ETHAN ALLEN INTERIORS INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The MD&A should be read in conjunction with our 2021 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with theSecurities and Exchange Commission (the "SEC"), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
The MD&A is presented in the following sections:
- Cautionary Note Regarding Forward-Looking Statements - Executive Overview - COVID-19 Update - Key Operating Metrics - Results of Operations - Reconciliation of Non-GAAP Financial Measures - Liquidity - Capital Resources, including Material Cash Requirements - Other Arrangements - Significant Accounting Policies - Critical Accounting Estimates - Recent Accounting Pronouncements
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including this MD&A, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Generally, forward-looking statements represent management's beliefs and
assumptions concerning current expectations, projections or trends relating to
results of operations, financial results, financial condition, strategic
objectives and plans, expenses, dividends, share repurchases, liquidity, use of
cash and cash requirements, investments, future economic performance, business
and industry and the effect of the COVID-19 pandemic on the business operations
and financial results. Such forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current facts. These
forward-looking statements may include words such as "anticipate," "estimate,"
"expect," "project," "plan," "intend," "believe," "continue," "may," "will,"
"short-term," "target," "outlook," "forecast," "future," "strategy,"
"opportunity," "would," "guidance," "non-recurring," "one-time," "unusual,"
"should," "likely," "COVID-19 impact," and other words and terms of similar
meaning in connection with any discussion of the timing or nature of future
operating or financial performance or other events. We derive many of our
forward-looking statements from operating budgets and forecasts, which are based
upon many detailed assumptions. While the Company believes that its assumptions
are reasonable, we caution that it is very difficult to predict the impact of
known factors and it is impossible for the Company to anticipate all factors
that could affect actual results and matters that are identified as "short
term," "non-recurring," "unusual," "one-time," or other words and terms of
similar meaning may in fact recur in one or more future financial reporting
periods.
18
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Forward-looking statements are subject to risks and uncertainties that may cause
actual results to differ materially from those that are expected. Actual results
could differ materially from those anticipated in the forward-looking statements
due to a number of risks and uncertainties including, but not limited to the
following: the global COVID-19 pandemic has, and could continue to have,
a materially adverse effect on the Company's business and its results of
operations; a resurgence of COVID-19 and resulting containment measures could
negatively impact our ability to fulfill existing order backlog or cause changes
in consumer demand; a resurgence of COVID-19 could lead to temporary closures,
including our distribution centers; the Company may require additional funding
from external sources, which may not be available at the levels required, or may
cost more than expected; declines in certain economic conditions, which impact
consumer confidence and spending; financial or operational difficulties due to
competition in the residential home furnishings industry; a significant shift in
consumer preference toward purchasing products online; an overall decline in the
health of the economy and consumer spending may reduce consumer purchases of
discretionary items; inability to maintain and enhance the Ethan Allen brand;
failure to successfully anticipate or respond to changes in consumer
tastes and trends in a timely manner; inability to maintain current design
center locations at current costs; failure to select and secure appropriate
retail locations; disruptions in the supply chain and supply chain management;
fluctuations in the price, availability and quality of raw materials resulting
in increased costs and production delays, and which could result in a decline in
sales; competition from overseas manufacturers and domestic retailers; the
number of manufacturing and distribution sites may increase exposure to business
disruptions and could result in higher transportation costs; current and former
manufacturing and retail operations and products are subject to increasingly
stringent environmental, health and safety requirements; product recalls or
product safety concerns; extensive reliance on information technology systems to
process transactions, summarize results, and manage the business and that of
certain independent retailers; disruptions in both primary and back-up systems;
successful cyber-attacks and the ability to maintain adequate cyber-security
systems and procedures; loss, corruption and misappropriation of data and
information relating to customers; global and local economic uncertainty may
materially adversely affect manufacturing operations or sources of merchandise
and international operations; changes in United States trade and tax policies;
the phasing out of LIBOR and the impact on interest rates used in future
borrowings; reliance on certain key personnel, loss of key personnel or
inability to hire additional qualified personnel; potential future asset
impairment charges resulting from changes to estimates or projections used to
assess assets' fair value, financial results that are lower than current
estimates or determinations to close underperforming locations; access
to consumer credit could be interrupted as a result of external conditions;
failure to protect the Company's intellectual property; hazards and risks which
may not be fully covered by insurance; a shortage of qualified labor within our
operations and our supply chain; labor disruptions resulting from COVID-19
vaccination mandates in the United States ; and other factors disclosed in Part
I, Item 1A. Risk Factors, in our 2021 Annual Report on Form 10-K, and elsewhere
here in this Quarterly Report on Form 10-Q.
All forward-looking statements attributable to the Company, or persons acting on
its behalf, are expressly qualified in their entirety by these cautionary
statements, as well as other cautionary statements. A reader should evaluate all
forward-looking statements made in this Quarterly Report on Form 10-Q in the
context of these risks and uncertainties. Given the risks and uncertainties
surrounding forward-looking statements, you should not place undue reliance on
these statements. Many of these factors are beyond our ability to control or
predict. The forward-looking statements included in this Quarterly Report on
Form 10-Q are made only as of the date hereof. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise, except as otherwise required by
law.
Executive Overview
Who We Are. Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen is
a leading interior design company, manufacturer and retailer in the home
furnishings marketplace. We are a global luxury home fashion brand that is
vertically integrated from product design through home delivery, which offers
our customers stylish product offerings, artisanal quality and personalized
service. As we celebrate 90 years of innovation, we are still known for the
quality and craftsmanship of our furniture as well as for the exceptional
personal service from design to delivery, and for our commitment to social
responsibility and sustainable operations. We provide complimentary interior
design service to our clients and sell a full range of home furnishing products
through a retail network of design centers located throughout the United States
and abroad as well as online at ethanallen.com. Ethan Allen design centers
represent a mix of locations operated by independent licensees and
Company-operated locations. As of December 31, 2021 , the Company operates 141
retail design centers; 136 located in the United States and five in Canada . Our
161 independently operated design centers are located in the United States ,
Asia , the Middle East and Europe . We also own and operate nine manufacturing
facilities, including three manufacturing plants, one sawmill, one rough mill
and a lumberyard in the United States and two manufacturing plants in Mexico and
one manufacturing plant in Honduras . Approximately 75% of our products are made
in our North American plants while we also partner with various suppliers
located in Europe , Asia , and other various countries to produce products that
support our business. During the first half of fiscal 2022, we reaffirmed our
commitment to maintain and grow our North American workshops, where our
customization capabilities help create relevant and quality products and has
proven to be both a strategic and a branding advantage. To further this
commitment, we are actively recruiting new employees for our manufacturing
plants, which we believe will enable us to be in a better position to serve our
clients.
Business Model. Ethan Allen has a distinct vision of American style, rooted in
the kind of substance that we believe differentiates us from our competitors.
Our business model is to maintain continued focus on (i) capitalizing on the
professional service offered to our customers by our interior design
professionals in our retail design centers, (ii) investing in new technologies
across key aspects of our vertically integrated business, (iii) utilizing
ethanallen.com as a key marketing tool to drive traffic to our design centers,
(iv) communicating our messages with strong advertising and marketing campaigns,
and (v) leveraging the benefits of our vertical integration by maintaining a
strong manufacturing capacity in North America .
19
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIESOur competitive advantages arise from:
? our North American manufacturing workshops providing customization
capabilities and high-quality products of the finest craftsmanship;
? offering complimentary design service through our interior design
professionals;? the use of technology combined with the personal service of our interior
design professionals;
? offering a wide array of custom made-to-order products across our upholstery,
case goods, and accent product categories;
? having built a strong retail network, both of independent licensees and
Company-operated locations;
? maintaining a logistics network of national distribution centers and retail
home delivery centers providing white-glove home delivery service; and
? leveraging our vertically integrated structure.
Fiscal 2022 Second Quarter in Review(1). More than 4,500 associates convened in
December 2021 to kick off the celebration of Ethan Allen's 90th year in
business, with an eye towards the future. As we celebrate 90 years of innovation
throughout fiscal 2022, our business fundamentals continue to be strong and
during the second quarter of fiscal 2022 we began to see further acceleration in
our net sales, with both wholesale and retail net sales reporting double-digit
growth. While our retail written orders were flat to a strong second quarter
last fiscal year, orders were up 44.6% from the same quarter two fiscal years
ago. Similarly, wholesale segment written orders were up 1.7% to last year, but
up 30.3% compared with the second quarter of fiscal 2020. The positive net sales
growth combined with our ability to operate more efficiently through the use of
technology and reduced headcount also led to a higher consolidated gross margin,
operating margin and diluted earnings per share. Manufacturing production
levels, which have substantially returned to pre-COVID-19 pandemic levels,
helped reduce our backlog during the second quarter of fiscal 2022. Delivery
lead-times remain higher than historical averages due to ongoing supply chain
delays and we expect these higher lead-times to continue in the near-term.
However, our unique vertical structure, whereby we produce about 75% of what we
sell, mostly on a custom made-to-order basis in our own North American
manufacturing plants, allows us to maintain stronger service levels and minimize
customer returns and excess inventory.
We were pleased with our performance during the second quarter of fiscal 2022,
as retail segment net sales were up 24.0% and wholesale segment net sales
increased 14.2%. We ended the second quarter with a strong balance sheet,
including cash on hand of $105.2 million while expanding our consolidated gross
and operating margins through disciplined cost and expense controls.
Consolidated net sales were up 16.4% during the second quarter of fiscal 2022
from strong written orders and increased manufacturing production that led to
higher deliveries combined with the prior year being negatively impacted by
COVID-19 production delays. The increased production was partially offset by
continued supply chain disruptions, which negatively impacted imports. As the
second quarter progressed, we saw an increase in receipt of import products from
a higher volume of shipping container receipts. Consolidated gross margin
increased 210 basis points to 58.8% primarily due to a change in the sales mix
and higher productivity in our wholesale manufacturing partially offset by
higher import and raw material costs. Operating margin increased from 12.6% of
sales in the second quarter of the prior year period to 17.4% of sales in the
current year second quarter. Adjusted operating margin, which excludes
restructuring initiatives, asset impairments and other corporate actions in both
periods presented, increased to 15.7% of sales, up from 13.1% of sales in the
prior year period, primarily due to strong gross margins and cost containment
measures. Diluted EPS grew 56.7% to $1.05 . Adjusted diluted EPS was $0.95 , an
increase of 37.7% as compared to the prior year second quarter.
We ended the second quarter of fiscal 2022 with $105.2 million of cash on hand,
an increase of $11.5 million in the last three months from $5.7 million of cash
from operating activities and the sale of two properties for total cash proceeds
of $8.2 million . Reflecting the strength of our balance sheet and strong history
of returning capital to shareholders, our Board increased our regular quarterly
cash dividend by 16% during the second quarter of fiscal 2022. As we head into
the 2022 calendar year, we believe we are well-positioned to continue our growth
in net sales while maintaining strong gross and operating profit margins due to
our strong retail network, the personal service of our interior design
professionals combined with technology, our unique vertical integration
structure whereby about 75% of our products are made in our North American
manufacturing workshops, and a strong national logistics with our retail home
delivery centers delivering product with white glove service to our clients'
home. We expect to see continued consumer interest in home furnishings and will
remain focused on investing in digital design and interactive communication
technologies, growing our business, generating strong cash flow, refining and
repositioning our product offerings to reach a larger client base, and
leveraging our vertical integration structure.
(1) Refer to the Reconciliation of Non-GAAP Financial Measures section within
this MD&A for the reconciliation of GAAP to adjusted key financial metrics.
20
--------------------------------------------------------------------------------ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES COVID-19 Update The COVID-19 pandemic continued to adversely impact our financial performance during the second quarter of fiscal year 2022 as shipping disruptions and manufacturing disruptions related to supply chain and labor constraints have driven delays. While demand for our products continues to be strong as customers allocate greater amounts of discretionary spending to home furnishings than at the start of the COVID-19 pandemic, supply and labor constraints may delay conversion of orders to shipments. Continuing logistical challenges are being faced by the entire home furnishings industry resulting from COVID-19-related supply chain disruptions creating significant delays in order fulfillment and increasing backlogs. We continue to operate in line with our vertical integration structure, producing approximately 75% of our products in our North American manufacturing facilities. The other 25% is sourced primarily fromSoutheast Asia andChina . The receipt of inventory and raw materials imported from these areas has at times, been slowed, disrupted and often more expensive than in prior years. Supply constraints. We are experiencing inflationary pressure on our materials coupled with supplier volatility as certain suppliers are also experiencing material and labor shortages. We are working to offset these issues through price increases on our products, supplier negotiations, global sourcing initiatives, make-versus-buy analyses, product re-engineering and parts standardization. Gross margin compression may result as our price increases to our customers may not occur as quickly as the inflationary pressure on our manufacturing inputs. Shipping disruptions. We expect to continue to be exposed to fluctuations in both domestic freight and ocean freight costs. Transportation costs are managed by optimizing logistics and supply chain planning, but the current freight rate levels are elevated such that significant year-over-year increases occurred during fiscal 2022 are expected to remain elevated. Ocean freight capacity issues continue to persist worldwide due to the ongoing global COVID-19 pandemic, which has resulted in significant price increases per shipping container. Labor constraints. While we are beginning to see improvements with respect to our ability to identify and hire talent, we are still experiencing a shortage of qualified full-time labor in certain geographies, particularly withUnited States manufacturing plant production workers and at our distribution facilities. Outside suppliers that we rely on have also experienced, and continue to experience, shortages of qualified labor. We continue to actively identify, recruit, develop and retain qualified talent, and in particular, are working towards our goal of growing our North American workshops. However, an ongoing shortage in certain geographies could result in increased costs from higher overtime and the need to hire temporary help to meet demand and higher wage rates from actions to attract and retain employees, which would negatively impact our results of operations. Vaccine mandates. The Biden administration is imposing a vaccine mandate on federal contractors and seeking to require large companies to have their employees vaccinated or undergo weekly COVID testing. As a federal contractor, we are taking steps to comply with the requirements of Executive Order 14042. Complying with either a vaccine mandate or proposed weekly testing requirements could be difficult, costly and result in attrition. See Item 1A. Risk Factors in this Quarterly Report on Form 10-Q, for discussion of risks associated with the potential adverse effects on our workforce of complying with vaccine mandates and testing requirements. In response to demand for our products, our teams continue to demonstrate agility and flexibility to identify ways to increase production capacity, which helped reduce backlog during the second quarter of fiscal 2022. We have increased capacity by growing manufacturing headcount, investing in plant technology upgrades and expanding our footprint within existing locations as well as adding second shifts and weekend production in our plants. We frequently monitor and re-evaluate our COVID-19 action plan based on guidance from theCenters for Disease Control and Prevention , other parts ofthe United States government, regulators and other health and safety organizations. We believe that we have a strong balance sheet with$105.2 million of cash and no bank borrowings outstanding as ofDecember 31, 2021 , which we believe will provide sufficient liquidity to continue business operations in the long-term. Although we continue to actively manage the impact of COVID-19 and the prospect of continuing or future outbreaks, we are unable to predict the impact that the COVID-19 pandemic will have on our financial operations in the near- and long-term. We also continue to actively manage our global supply chain and manufacturing operations, which may continue to be adversely impacted with respect to availability and pricing based on uncontrollable factors. 21 --------------------------------------------------------------------------------ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Key Operating Metrics
A summary of our key operating metrics is presented in the following table (in millions, except per share data).
Three months ended Six months ended
December 31, December 31,
2021 % of Sales % Chg 2020 % of Sales % Chg 2021 % of Sales % of Chg 2020 % of Sales % of Chg
Net sales $ 208.1 100.0 % 16.4 % $ 178.8 100.0 % 2.4 % $ 390.4 100.0 % 18.4 % $ 329.9 100.0 % (5.3 %)
Gross profit $ 122.3 58.8 % 20.7 % $ 101.3 56.7 % 3.9 % $ 231.5 59.3 % 23.7 % $ 187.1 56.7 % (2.2 %)
Adjusted gross
profit(1) $ 122.3 58.8 % 20.2 % $ 101.7 56.9 % 3.9 % $ 231.5 59.3 % 23.5 % $ 187.5 56.8 % (4.3 %)
Operating income
12.6 % 145.1 %$ 63.7 16.3 % 85.9 %$ 34.2 10.4 % 23.0 % Adjusted operating income(1)$ 32.8 15.7 % 40.3 %$ 23.4 13.1 % 146.3 %$ 60.5 15.5 % 69.6 %$ 35.7 10.8 % 64.4 % Net income$ 26.9 12.9 % 59.3 %$ 16.9 9.4 % 138.3 %$ 47.0 12.1 % 79.3 %$ 26.2 8.0 % 23.8 % Adjusted net income(1)$ 24.3 11.7 % 38.6 %$ 17.5 9.8 % 139.7 %$ 44.7 11.4 % 68.9 %$ 26.5 8.0 % 59.8 % Diluted EPS$ 1.05 56.7 %$ 0.67 148.1 %$ 1.85 77.9 %$ 1.04 31.6 % Adjusted diluted EPS(1)$ 0.95 37.7 %$ 0.69 155.6 %$ 1.75 66.7 %$ 1.05 69.4 % Cash flow from operating activities$ 5.7 (75.9 %)$ 23.7 nm$ 22.7 (65.6 %)$ 65.9 181.8 % Adjusted annualized return on equity(1) 23.8 % 15.6 % Wholesale written orders 1.7 % 28.1 % 5.3 % 10.7 % Retail written orders (0.2 %) 44.9 % 3.1 % 25.1 %
(1) Refer to the Reconciliation of Non-GAAP Financial Measures section within
this MD&A for the reconciliation of GAAP to adjusted key financial metrics.
The following table shows our design center information.
Fiscal 2022 Fiscal 2021
Independent Company- Independent Company-
retailers operated Total retailers operated Total
Retail Design Center activity:
Balance at July 1 161 141 302 160 144 304
New locations 4 - 4 8 - 8
Closures (4 ) - (4 ) (10 ) - (10 )
Transfers - - - - - -
Balance at December 31 161 141 302 158 144 302
Relocations (in new and closures) - 1 1 - - -
Retail Design Center geographic locations:
United States 34 136 170 34 138 172
Canada - 5 5 - 6 6
China 109 - 109 107 - 107
Other Asia 11 - 11 11 - 11
Middle East and Europe 7 - 7 6 - 6
Total 161 141 302 158 144 302
Results of Operations
For an understanding of the significant factors that influenced our financial
performance during the three and six months ended December 31, 2021 and 2020,
respectively, the following discussion should be read in conjunction with the
consolidated financial statements and related notes presented in this Quarterly
Report on Form 10-Q.
Fiscal 2022 Second Quarter compared with Fiscal 2021 Second Quarter
(in thousands) Three months ended
December 31,
2021 2020 % Change
Consolidated net sales $ 208,093 $ 174,826 16.4 %
Wholesale net sales $ 115,921 $ 101,550 14.2 %
Retail net sales $ 179,583 $ 144,818 24.0 %
Consolidated gross profit $ 122,269 $ 101,332 20.7 %
Consolidated gross margin 58.8 % 56.7 %
22
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated net sales were $208.1 million , an increase of 16.4% compared to the
prior year period. We continue to experience sustained higher demand for our
products, which led to strong written orders during the current quarter.
Increased manufacturing production led to higher deliveries combined with the
prior year impact from the COVID-19 pandemic, which negatively impacted our
ability to deliver product to customers. The second quarter of fiscal 2022
marked the first fiscal quarter since the start of the pandemic during which our
existing order backlog decreased, which we attribute to improved production and
import product flow. However, we still believe it will take several quarters for
manufacturing to catch up to the increase in customer demand as there remain
ongoing supply chain challenges including certain raw material shortages,
increased cost of shipping and import product delays. As we continue to work
through the high backlog, there is an opportunity for future positive growth in
delivered net sales based on the size of our order backlog, written order growth
and our ability to work through these COVID-19 related disruptions. Partially
offsetting the sales growth in the second quarter was a decline in contract
sales, which fell by 15.5%. In particular, the year-over-year decrease in
contract sales was attributable to lower sales from our contract with the United
States government General Services Administration ("GSA"), which was negatively
impacted by COVID-19-related economic disruptions and delays combined with lower
hospitality sector sales. While contract sales declined during the current
second quarter, we are optimistic for future growth as written orders from our
GSA contract increased 63.5% in the first six months of fiscal 2022 compared
with a year prior.
Wholesale net sales increased 14.2% to $115.9 million primarily due to a 20.3%
increase in intersegment sales to our Company-operated design centers combined
with a 10.9% increase in sales to our United States independent dealers
partially offset by lower contract and international sales. Excluding
intersegment sales to our retail segment, wholesale net sales decreased
year-over-year from lower contract and international sales. The 15.5% decline in
our contract business sales was primarily due to lower GSA sales from delayed
purchase commitments and lower hospitality sector sales combined with high
backlog and increased production lead-times resulting in net sales being
extended into future periods. Our international net sales were down 26.6% due to
a reduction in net sales to China . Our international sales to independent
retailers represented 2.8% of total wholesale net sales compared to 4.4% in the
prior year period.
Wholesale written orders, which represents orders booked through all of our
channels, were up 1.7% in the second quarter of fiscal 2022 compared with the
prior year. After the reopening of all our retail design centers in early fiscal
2021, we experienced a significant surge in demand leading to a strong, but
difficult prior year comparison. However, we are pleased to continue to see
sustained higher demand for products in the home furnishings category. As a
result of the strong prior year second quarter, wholesale orders from our
Company-operated design centers decreased 3.7%, our independent North American
retail network orders were down 9.9% and international orders from China
declined 38.2%. When compared to the second quarter two years ago, written
orders from our Company-operated design centers are up 32.3% while our
independent North American retail network grew by 27.2%. The growth rate of
written orders during the second quarter of fiscal 2022 was facilitated, in
part, by strong contract business during the period, during which we reported an
order growth of 844.4% as a result of a mix of hospitality and GSA business. Due
to strong production and related deliveries, we were able to progressively
decrease wholesale backlog by 12.1% during this second quarter. However, due to
the strong written order growth during the past 12 months, our wholesale backlog
remained high, up 47.8% compared to the prior fiscal year, and up 2.3% from June
30, 2021 . We remain focused on increasing wholesale production and shipping to
the levels that are necessary to service our customers on a timely basis and
reduce our backlog during the remainder of fiscal 2022.
Retail net sales from Company-operated design centers increased 24.0% to $179.6
million . There was a 25.3% increase in net sales in the United States , while net
sales from our Canadian design centers decreased 11.0%. Retail net sales were up
24.0% due to strong written orders, increased premier home delivery revenue and
strong shipments from manufacturing production that led to higher customer
deliveries, compared to the prior year which was negatively impacted by
production delays as a result of the COVID-19 pandemic. As noted earlier, after
the reopening of all our retail design centers in early fiscal 2021, we
experienced a significant surge in demand leading to a strong, but difficult
prior year comparison. As a result, our retail written orders decreased 0.2%
year over year, but are up 44.6% from two years ago, reflecting the strength of
our product offerings and interior design professionals increasingly combining
technology with their personal service and continued consumer interest in the
home. We have continued to experience strong order trends driven by increased
demand for products and strong execution at the design center level, including a
1.7% increase in traffic. As of December 31, 2021 , there were 141
Company-operated design centers compared with 144 in the prior year period.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Gross profit increased 20.7% to $122.3 million compared with the prior year
second quarter due to sales growth within both the wholesale and retail
segments, a change in the sales mix, product pricing actions taken, benefits
realized from the ongoing manufacturing and logistics optimization project and a
favorable product mix partially offset by higher raw material and freight costs
and increased production and overhead costs. Retail gross profit was up due to a
24.0% increase in net shipments combined with a 270-basis point improvement in
gross margin from a favorable change in product mix, higher premier home
delivery revenue, an increase in average ticket sale and less clearance sales
partially offset by promotional fees from financing promotions. Wholesale gross
profit decreased in the current year second quarter due to rising raw material
and freight costs due to higher demand and global supply chain challenges.
Continued manufacturing capacity expansion, in response to significant increases
in written order demand, further drove an increase in production costs and labor
challenges that led to a reduction wholesale gross profit and margin. Partially
offsetting these decreases were a 14.2% increase in wholesale net sales volumes,
efficiencies gained from higher manufacturing production levels and benefits
being realized from the previously executed optimization of manufacturing and
logistics initiatives. Each product category within wholesale (upholstery, case
goods and home accents) increased its net sales, which helped to partially
offset rising costs within the wholesale segment.
Gross margin was 58.8%, up from 56.7% a year prior due to a change in the sales
mix, benefits realized from the ongoing manufacturing and logistics optimization
project and a favorable product mix. Retail sales, as a percentage of total
consolidated sales, were 86.3% in the current year second quarter, up from 81.0%
in the prior year period, which sales mix positively affected consolidated gross
margin. We expect this higher percentage of retail sales to consolidated sales
to moderate towards normalized levels as we increase delivery of the high
wholesale order backlog. Our merchandising and supply chain teams continue to
work through the current environment of rapidly escalating commodity and freight
costs, product shortages, price increases and shipping delays. While we were
pleased with a strong consolidated gross margin of 58.8%, we expect our margins
to return to a range of approximately 57.0% to 57.5% in the near term from the
impact of escalating raw material, labor and freight costs combined with a
return of our sales mix to more historical norms. Benefits realized from
increased productivity from the ongoing manufacturing and logistics optimization
project helped to minimize margin pressure from rising freight and raw material
costs.
(in thousands) Three months ended
December 31,
2021 2020 % Change
SG&A expenses $ 89,610 $ 78,354 14.4 %
Restructuring and other impairment
charges, net of gains $ (3,633 ) $ 423 nm
Consolidated operating income $ 36,292 $ 22,555 60.9 %
Consolidated operating margin 17.4 % 12.6 %
Wholesale operating income $ 9,744 $ 12,720 (23.4 %)
Retail operating income $ 22,635 $ 9,909 128.4 %
SG&A expenses increased to $89.6 million , or 43.1% of net sales, compared with
$78.4 million , or 43.8% of net sales in the prior year period. The 14.4%
increase was primarily driven by higher selling costs with a modest increase
within general and administrative expenses compared to the prior year period.
Retail selling expenses were up 22.2% due to the 24.0% increase in net sales,
which drove higher delivery costs as well as increased variable compensation.
Wholesale selling costs, which includes logistics, grew by 13.7% as fuel and
freight costs increased from higher sales volumes and rising commodity prices.
These selling costs were partially offset by a reduction in marketing spend. For
the second quarter of fiscal 2022, we reduced our advertising in various mediums
including national television and regional radio markets, thereby reducing our
overall advertising spend to 2.0% of net sales compared to 2.8% in the prior
year second quarter. However, through our recent digital campaigns, we have
substantially increased our digital marketing outreach, which helped us reach
more households through the publication of our digital magazine. For the rest of
this fiscal year 2022, we expect to increase our advertising to approximately
3-4% of net sales. General and administrative expenses were well managed during
the quarter, increasing 6.4%, primarily due to higher compensation and office
expense from additional headcount coupled with increased regional management
costs, general business insurance and professional fees. SG&A expenses, when
expressed as a percentage of sales, decreased 70 basis points in the second
quarter of fiscal 2022, compared with the same period in the prior year,
primarily due to higher sales volume relative to fixed costs. SG&A expenses were
up 14.4% while consolidated net sales grew at a much faster rate of 16.4%, which
led to improved operating leverage at both the retail and wholesale segment. Our
ability to increase net sales in the future will continue to further improve our
operating margins due to the leverage of our vertically integrated structure.
Restructuring and other impairment charges, net of gains was a reported $3.6
million gain compared to a loss of $0.4 million in the prior year period. During
the second quarter of fiscal 2022, we completed the sale of two properties for a
combined pre-tax gain of $3.9 million . In the year ago second quarter, we sold a
previously closed retail property resulting in a pre-tax loss of $0.3 million .
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Operating income was $36.3 million compared with $22.6 million in the prior year
period. Adjusted operating income, which excludes restructuring and other
charges, was $32.8 million , or 15.7% of net sales compared with $23.4 million ,
or 13.1% of net sales in the prior year period. The significant increase in
operating income of $9.4 million or 40.3% was driven by the $29.3 million
increase in consolidated net sales, retail and consolidated gross margin
expansion, reduced marketing spend and strong cost containment measures
partially offset by higher selling expenses and a reduction in our wholesale
margin. Our ability to maintain disciplined cost and expense controls, including
strong cost containment measures, reduced marketing spend and tight expense
management within our general and administrative expenses, continues to help
drive operating income growth. Compared to the end of the second quarter of the
prior year period, our headcount is up 547 associates or 14.9%. However,
compared to two years ago, global headcount is down 7.2%, which has contributed
to consolidated operating income expansion.
Wholesale operating income was $9.7 million or 8.4% of net sales, a decrease
compared with $12.7 million or 12.5% of net sales in the prior year period due
to gross margin contraction from higher raw material and overhead production
costs, increased freight due to incremental volume and price, higher
compensation and office expense from additional headcount and increased general
business insurance and professional fees. While net sales rose by 14.2% and
manufacturing production levels returned back to near pre-COVID-19 levels, these
headwinds outpaced these benefits. Since the wholesale segment bore most of
these incremental costs of production, it led to the 23.4% decrease in wholesale
operating income.
Retail operating income was $22.6 million , or 12.6% of sales, compared with $9.9
million , or 6.8% of sales in the prior year period. The retail operating margin
improved to 12.6% primarily due to the 24.0% increase in net sales, a 270-basis
point expansion in retail gross margin and the ability to manage operating
expenses, which grew at a rate lower than net sales. While selling, delivery and
variable compensation expenses were up due to the growth in sales volume, total
retail operating expenses including restructuring and impairment charges, when
expressed as a percentage of net sales, decreased 310 basis points. Total retail
operating expenses represented 36.9% of net sales compared to 40.0% in the prior
year period. The decreases within retail operating expenses were due to the
ability to leverage fixed costs, including occupancy costs, maintain lower
administrative headcount, adhere to strong cost control measures implemented at
the onset of the COVID-19 pandemic and drive strong written orders while
maintaining lower than our historical advertising cost average.
(in thousands, except per share data) Three months ended
December 31,
2021 2020 % Change
Income tax expense $ 9,324 $ 5,295 76.1 %
Effective tax rate 25.7 % 23.9 %
Net income $ 26,894 $ 16,883 59.3 %
Diluted EPS $ 1.05 $ 0.67 56.7 %
Income tax expense was $9.3 million compared with $5.3 million in the prior year
second quarter primarily due to the $14.0 million increase in income before
income taxes. Our consolidated effective tax rate was 25.7% compared with 23.9%
in the prior year comparable period. Our effective tax rate of 25.7% varies from
the 21% federal statutory rate primarily due to state taxes.
Net income was $26.9 million compared with $16.9 million in the prior year
period. Adjusted net income, which removes the after-tax impact of restructuring
and other charges, was $24.3 million , up 38.6% from the prior year period due to
stronger net sales, improved retail and consolidated gross margins, cost
containment measures resulting in minimizing operating expense growth and
improving production and delivery of products to customers.
Diluted EPS was $1.05 compared with $0.67 per diluted share in the prior year
comparable period. Adjusted diluted EPS was $0.95 , up 37.7% compared with the
prior year period primarily due to net sales growth of 16.4%, expanded retail
and consolidated gross margins, our ability to minimize operating expense
growth, and improved production and delivery of products to customers partially
offset by higher raw material and freight costs, which negatively impacted our
wholesale gross and operating margins.
Six Months ended December 31, 2021 compared with Six Months December 31, 2020
(in thousands) Six months ended
December 31,
2021 2020 % Change
Consolidated net sales $ 390,420 $ 329,884 18.4 %
Wholesale net sales $ 225,369 $ 198,884 13.3 %
Retail net sales $ 334,569 $ 262,899 27.3 %
Consolidated gross profit $ 231,461 $ 187,102 23.7 %
Consolidated gross margin 59.3 % 56.7 %
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated net sales were $390.4 million , an increase of 18.4% compared to the
prior year period. Net sales growth accelerated during the first half of fiscal
2022 as we increased manufacturing production that led to higher deliveries
combined with the prior year being negatively impacted by COVID-19 production
delays.
Wholesale net sales increased 13.3% to $225.4 million primarily due to a 20.0%
increase in intersegment sales to our Company-operated design centers combined
with a 13.0% increase in sales to our U.S. independent dealers partially offset
by lower contract and international sales. Excluding intersegment sales to our
retail segment, wholesale net sales decreased year-over-year from lower contract
and international sales. While our contract business sales were down 19.6%,
written orders over that same period were up 91.4%, thus we are confident the
sales decrease is temporary and due to delayed purchase commitments that will
convert to net sales upon delivery during the remainder of fiscal 2022. Our
international net sales were down 30.8% due to a reduction in net sales to
China . Our international sales to independent retailers represented 3.0% of
total wholesale net sales compared to 5.0% in the prior year period.
Wholesale written orders, which represents orders booked through all of our
channels, were up 5.3% in the first half of fiscal 2022 compared with the prior
year. Wholesale orders from our Company-operated design centers increased 1.9%
while our contract business performed very well, increasing 91.4%. Partially
offsetting the growth was an 8.1% decrease in orders from our independent North
American retail network and a 60.4% decrease in international orders from China .
Retail net sales from Company-operated design centers increased 27.3% to $334.6
million . There was a 28.2% increase in net sales in the United States , while net
sales from our Canadian design centers increased 0.1%. Retail written orders
grew 3.1% year-over-year, reflecting the strength of our product offerings and
interior design professionals increasingly combining technology with their
personal service and continued consumer interest in the home. We have continued
to experience strong order trends driven by increased demand for products and
strong execution at the design center level.
Gross profit increased 23.7% to $231.5 million compared with the prior year due
to strong sales growth within both the wholesale and retail segments, a change
in the sales mix, recent product pricing actions taken, benefits realized from
the ongoing manufacturing and logistics optimization project and a favorable
product mix partially offset by higher raw material and freight costs and
increased production and overhead costs. Retail gross profit was up due to a
27.3% increase in net shipments combined with a 210-basis point improvement in
gross margin from a favorable change in product mix, higher premier home
delivery revenue, an increase in average ticket sale and less clearance sales
partially offset by promotional fees from financing promotions. Wholesale gross
profit decreased year-over-year due to the aforementioned higher shipping and
raw material costs that led to increased production costs.
Gross margin was 59.3%, up from 56.7% a year prior due to a change in the sales
mix, a favorable product mix and benefits realized from the ongoing
manufacturing and logistics optimization project partially offset by higher
wholesale production costs. Retail sales, as a percentage of total consolidated
sales, were 85.7% in the current year, up from 79.7% in the prior year period,
which sales mix positively affected consolidated gross margin. Benefits realized
from increased productivity from the ongoing manufacturing and logistics
optimization project helped to minimize margin pressure from rising freight and
raw material costs.
(in thousands) Six months ended
December 31, % Change
SG&A expenses $ 171,187 $ 151,820 12.8 %
Restructuring and other
impairment charges, net of gains $ (3,378 ) $ 1,046 (422.9 %)
Consolidated operating income $ 63,652 $ 34,236 85.9 %
Consolidated operating margin 16.3 % 10.4 %
Wholesale operating income $ 22,563 $ 25,858 (12.7 %)
Retail operating income $ 36,980 $ 11,892 211.0 %
SG&A expenses increased to $171.2 million , or 43.8% of net sales, compared with
$151.8 million , or 46.0% of net sales in the prior year period. The 12.8%
increase was driven by higher selling costs while general and administrative
expenses remained comparable to the prior year period. Retail selling expenses
were up 23.5% due to the 27.3% increase in net sales while wholesale selling
costs grew by 9.5% as fuel and freight costs increased from higher sales volumes
and rising trucking and shipping costs. These incremental SG&A costs were
partially offset by a reduction in marketing spend. General and administrative
expenses were well managed during the first half of the year, increasing 3.5%,
primarily due to additional headcount coupled with increased regional management
costs. SG&A expenses, when expressed as a percentage of sales, decreased 220
basis points in the first half of fiscal 2022, compared with the same period in
the prior year, primarily due to higher sales volume relative to fixed costs.
SG&A expenses were up 12.8% while consolidated net sales grew at a rate of
18.4%, which led to improved operating leverage.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Restructuring and other impairment charges, net of gains were a gain of $3.4
million compared to a loss of $1.0 million in the prior year period. The current
year charges primarily relate to the sale of our two properties for $3.9 million
partially offset by severance and other lease exit costs. The prior year charge
of $1.0 million related primarily to the impairment of long-lived assets held at
a retail design center location and a loss on the sale of a previously owned
retail design center.
Operating income was $63.7 million compared with $34.2 million in the prior year
period. Adjusted operating income, which excludes restructuring and other
charges, was $60.5 million , or 15.5% of net sales compared with $35.7 million ,
or 10.8% of net sales in the prior year period. The significant increase in
operating income of $24.8 million was driven by the $60.5 million increase in
consolidated net sales, consolidated and retail gross margin expansion and
reduced marketing spend partially offset by lower wholesale gross margin and
higher selling expenses.
Wholesale operating income was $22.6 million or 10.0% of net sales, a decrease
compared with $25.9 million or 13.0% of net sales in the prior year period due
to gross margin contraction from higher raw material, freight and production
costs combined with higher compensation and office expense from additional
headcount and increased general business insurance and professional fees. These
headwinds were partially offset by higher sales volumes and manufacturing
production levels as well as strong cost containment measures, including
improved expense management that helped reduce wholesale general and
administrative expenses, when expressed as a percentage of net sales.
Retail operating income was $37.0 million , or 11.1% of sales, compared with
$11.9 million , or 4.5% of sales in the prior year period. The retail operating
margin improved to 11.1% primarily due to the 27.3% increase in net sales and a
210-basis point expansion in retail gross margin combined with holding operating
expenses to a growth rate of 14.0%. While selling, delivery and variable
compensation expenses were up due to the growth in sales volume, total retail
operating expenses including restructuring and impairment charges, when
expressed as a percentage of net sales, decreased 440 basis points. Total retail
operating expenses represented 37.9% of net sales compared to 42.3% in the prior
year period. The decreases within retail operating expenses were due to the
ability to leverage fixed costs, reduced marketing spend, maintain lower
administrative headcount and adhere to strong cost control measures implemented
at the onset of the COVID-19 pandemic.
(in thousands, except per share data) Six months ended
December 31,
2021 2020 % Change
Income tax expense $ 16,511 $ 7,183 129.9 %
Effective tax rate 26.0 % 21.5 %
Net income $ 47,047 $ 26,236 79.3 %
Diluted EPS $ 1.85 $ 1.04 77.9 %
Income tax expense was $16.5 million compared with $7.2 million in the prior
year primarily due to the $30.1 million increase in income before income taxes
and the prior year reversal of a valuation allowance. Our consolidated effective
tax rate was 26.0% compared with 21.5% in the prior year comparable period. Our
fiscal 2022 effective tax rate of 26.0% varies from the 21% federal statutory
rate primarily due to state taxes. The increase in the effective tax rate
compared with the prior year period was primarily due to a $0.9 million
reduction in our valuation allowance on state and local retail deferred tax
assets. Absent this discrete adjustment, our effective tax rate in the year ago
second quarter would have been 24.1%.
Net income was $47.0 million compared with $26.2 million in the prior year
period. Adjusted net income, which removes the after-tax impact of restructuring
and other charges, was $44.7 million , up 68.9% from the prior year period due to
stronger net sales, improved retail and consolidated gross margins and strong
cost containment measures resulting in minimizing operating expense growth.
Diluted EPS was $1.85 compared with $1.04 per diluted share in the prior year
comparable period. Adjusted diluted EPS was $1.75 , up 66.7% compared with the
prior year period primarily due to net sales growth of 18.4%, expanded retail
and consolidated gross margins and our ability to minimize operating expense
growth partially offset by higher raw material, production and freight costs,
which negatively impacted our wholesale gross and operating margins.
Reconciliation of Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including adjusted gross profit and margin, adjusted operating income and margin, adjusted wholesale operating income and margin, adjusted retail operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below. These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following tables below show a reconciliation of non-GAAP financial measures
used in this filing to the most directly comparable GAAP financial measures.
(in thousands, except
per share data) Three months ended Six months ended
December 31, December 31,
2021 2020 % Change 2021 2020 % Change
Consolidated Adjusted Gross Profit
/ Gross Margin
GAAP Gross profit $ 122,269 $ 101,332 20.7 % $ 231,461 $ 187,102 23.7 %
Adjustments (pre-tax)
* - 389 - 389
Adjusted gross profit
* $ 122,269 $ 101,721 20.2 % $ 231,461 $ 187,491 23.5 %
Adjusted gross margin
* 58.8 % 56.9 % 59.3 % 56.8 %
Consolidated Adjusted Operating
Income / Operating Margin
GAAP Operating income $ 36,292 $ 22,555 60.9 % $ 63,652 $ 34,236 85.9 %
Adjustments (pre-tax)
* (3,520 ) 812 (3,152 ) 1,435
Adjusted operating
income * $ 32,772 $ 23,367 40.3 % $ 60,500 $ 35,671 69.6 %
Consolidated Net
sales $ 208,093 $ 178,826 16.4 % $ 390,420 $ 329,884 18.4 %
GAAP Operating margin 17.4 % 12.6 % 16.3 % 10.4 %
Adjusted operating
margin * 15.7 % 13.1 % 15.5 % 10.8 %
Consolidated Adjusted Net
Income / Adjusted Diluted
EPS
GAAP Net income $ 26,894 $ 16,883 59.3 % $ 47,047 $ 26,236 79.3 %
Adjustments, net of
tax * (2,637 ) 613 (2,361 ) 215
Adjusted net income $ 24,257 $ 17,496 38.6 % $ 44,686 $ 26,451 68.9 %
Diluted weighted
average common shares 25,513 25,309 25,482 25,257
GAAP Diluted EPS $ 1.05 $ 0.67 56.7 % $ 1.85 $ 1.04 77.9 %
Adjusted diluted EPS
* $ 0.95 $ 0.69 37.7 % $ 1.75 $ 1.05 66.7 %
Wholesale Adjusted Operating Income / Adjusted
Operating Margin
Wholesale GAAP
operating income $ 9,744 $ 12,720 (23.4% ) $ 22,563 $ 25,858 (12.7% )
Adjustments (pre-tax)
* (3,734 ) 389 (3,556 ) 389
Adjusted wholesale
operating income * $ 6,010 $ 13,109 (54.2% ) $ 19,007 $ 26,247 (27.6% )
Wholesale net sales $ 115,921 $ 101,550 14.2 % $ 225,369 $ 198,884 13.3 %
Wholesale GAAP
operating margin 8.4 % 12.5 % 10.0 % 13.0 %
Adjusted wholesale
operating margin * 5.2 % 12.9 % 8.4 % 13.2 %
Retail Adjusted Operating Income / Adjusted
Operating Margin
Retail GAAP operating
income $ 22,635 $ 9,909 128.4 % $ 36,980 $ 11,982 211.0 %
Adjustments (pre-tax)
* 214 423 404 1,046
Adjusted retail
operating income * $ 22,849 $ 10,332 121.2 % $ 37,384 $ 12,938 188.9 %
Retail net sales $ 179,583 $ 144,818 24.0 % $ 334,569 $ 262,899 27.3 %
Retail GAAP operating
margin 12.6 % 6.8 % 11.1 % 4.5 %
Adjusted retail
operating margin * 12.7 % 7.1 % 11.2 % 4.9 %
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
* Adjustments to reported GAAP financial measures including gross profit and
margin, operating income and margin, net income, and diluted EPS have been
adjusted by the following:
Three months ended Six months ended
(in thousands) December 31, December 31,
2021 2020 2021 2020
Inventory reserves and write-downs
(wholesale) $ - $ 389 $ - $ 389
Adjustments to gross profit $ - $ 389 $ - $ 389
Inventory reserves and write-downs
(wholesale) $ - $ 389 $ - $ 389
(Gain) on sale of property, plant and
equipment (wholesale) (3,913 ) - (3,913 ) -
Loss on sale of property, plant and
equipment (retail) - 273 - 273
Severance and other charges
(wholesale) 179 - 357 -
Severance and other charges (retail) 101 150 178 150
Impairment of long-lived assets
(retail) 113 - 226 623
Adjustments to operating income
(3,152 )$ 1,435 Adjustments to income before income taxes$ (3,520 ) $ 812 $ (3,152 ) $ 1,435 Related income tax effects on non-recurring items(1) 883 (199 ) 791 (352 ) Income tax benefit from valuation allowance change - - - (868 ) Adjustments to net income$ (2,637 ) $ 613 $ (2,361 ) $ 215
(1) Calculated using a tax rate of 25.1% in the current year and 24.5% in the
prior year.
Liquidity
We are committed to maintaining a strong balance sheet in order to weather
difficult industry conditions to allow us to take advantage of opportunities in
the markets and to execute our long-term strategic initiatives. Our sources of
liquidity include cash and cash equivalents, cash flow from operations and
amounts available under our credit facility. We believe these sources remain
adequate to meet our short-term and long-term liquidity requirements, finance
our long-term growth plans, and fulfill other cash requirements for day-to-day
operations and capital expenditures. We continue to monitor our liquidity
closely during this continued period of uncertainty and volatility globally, as
well as within our industry, related to the COVID-19 pandemic.
We believe our liquidity (cash on hand of $105.2 million , cash flow from
operating activities of $22.7 million and amounts available under our credit
facility of $102.2 million ), will be sufficient to fund our operations,
including changes in working capital, anticipated capital expenditures, fiscal
2022 contractual obligations and other financing activities, as they occur, for
at least the next 12 months.
As of December 31, 2021 , we had working capital of $93.4 million compared to
$71.4 million at June 30, 2021 and a current ratio of 1.42 at December 31, 2021 ,
comparable to 1.32 at June 30, 2021 and 1.31 at December 31, 2020 . Included in
our cash and cash equivalents at December 31, 2021 , is $7.3 million held by
foreign subsidiaries, a portion of which we have determined to be indefinitely
reinvested.
Summary of Cash Flows
At December 31, 2021 , we held cash and cash equivalents $105.2 million compared
with $104.6 million at June 30, 2021 . Cash and cash equivalents aggregated to
15.3% of our total assets at December 31, 2021 , compared with 12.6% of our total
assets a year prior and 15.3% at June 30, 2021 . Our cash and cash equivalents
increased $0.6 million of 0.6% during the first half of fiscal 2022 due to net
cash provided by operating activities of $22.7 million and $8.2 million in
proceeds received from the sale of two real estate properties partially offset
by $25.4 million in cash dividends paid and capital expenditures of $3.7
million .
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table illustrates the main components of our cash flows for the
six months ended
Six months ended
December 31,
2021 2020
Operating activities
Net income $ 47.0 $ 26.2
Non-cash operating lease cost 14.9 15.0
Other non-cash items, including depreciation and amortization 6.9
9.6
Restructuring payments (0.6 ) -
Change in working capital (45.5 ) 15.1
Total provided by operating activities $ 22.7 $ 65.9
Investing activities
Capital expenditures $ (3.7 ) $ (5.9 )
Proceeds from disposal of property, plant and equipment 8.2 1.2
Total provided by (used in) investing activities$ 4.5 $ (4.7 ) Financing activities Payments on borrowings $ -$ (50.0 ) Dividend payments (25.4 ) (5.3 ) Taxes paid related to net share settlement of equity awards (0.8 )
-
Proceeds from employee stock plans 0.8
1.6
Payments on financing leases and other (0.2 ) (0.2 ) Total used in financing activities$ (25.6 ) $ (53.9 ) Cash Provided by (Used in) Operating Activities. We generated$22.7 million in cash from operating activities during the first six months of fiscal 2022, a decrease from$65.9 million in the prior year period primarily due to an increase in working capital and restructuring payments partially offset by higher net income generated during the period. The increase in working capital was led by higher inventory to increase material availability to support expanded manufacturing and distribution capacity to meet written order growth, a decrease in customer deposits as retail segment net delivered sales outpaced its written orders and operating lease payments made of$16.7 million . The prior year change in working capital was primarily due to lower net shipments combined with strong written order growth that drove the customer deposit balance significantly up. As our manufacturing production increases each quarter, our ability to grow net shipments does as well, which has led to our customer deposits balance decreasing. The combination of growing our inventory balance to support the surge in demand and the reduction in customer deposits from increased net shipments led to the significant year-over-year change in working capital. Restructuring payments made during the first half of fiscal 2022 of$0.6 million were primarily for severance,Atoka, Oklahoma distribution center closing costs and lease exit costs (ongoing monthly rent). Cash Provided by (Used in) Investing Activities. Cash provided by investing activities was$4.5 million , an increase of$9.2 million from cash used of$4.7 million in the prior year period due to proceeds received from the sale of two properties and a reduction in capital expenditures. Capital expenditures of$3.7 million during the first half of fiscal 2022 related to spending on retail design center projection improvements and relocations, manufacturing plant upgrades to further increase capacity and efficiency and investments in technology upgrades. We completed the sale of our previously closedAtoka, Oklahoma distribution center to an independent third party inOctober 2021 and received$2.8 million in cash less$0.2 million in closing costs. In addition, inDecember 2021 , we completed the sale of a property for$5.6 million in cash. In the first six months of fiscal 2021, we sold a previously closed retail property and received$1.3 million in cash less$0.1 million in closing costs. Cash Provided by (Used in) Financing Activities. Cash used in financing activities was$25.6 million during the first six months of fiscal 2022 compared with cash used of$53.9 million in the prior year period. The significant change in cash used in financing activities was due to the repayment of$50.0 million in outstanding borrowings last year partially offset by the payment of a special cash dividend in the current fiscal year. Total cash dividends paid in fiscal 2022 were$25.4 million , including a$0.75 per share special dividend paid inAugust 2021 totaling$19.0 million . The year ago first quarter did not have any cash dividends paid as the Board had previously suspended the cash dividend due to the COVID-19 impact. However, onAugust 4, 2020 , our Board reinstated the regular quarterly cash dividend and declared a cash dividend, which was paid onOctober 22, 2020 . The regular quarterly dividend declared by our Board onNovember 30, 2021 , which increased the quarterly dividend by 16% to$0.29 per share, was paid onJanuary 5, 2022 , thus excluded from the consolidated statement of cash flows for the six months endedDecember 31, 2021 . 30 -------------------------------------------------------------------------------- ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES We present restricted cash as a component of total cash and cash equivalents as presented on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. As ofDecember 31, 2021 , we held$0.9 million of restricted cash related to an Ethan Allen insurance captive. We did not hold any restricted cash as ofJune 30, 2021 . Exchange Rate Changes. Due to changes in exchange rates, our cash and cash equivalents were negatively impacted by$0.1 million during the first half of fiscal 2022. These changes had an immaterial impact on our cash balances held inCanada ,Mexico , andHonduras .
Capital Resources, including Material Cash Requirements
Sources of Liquidity Capital Needs. We maintain a revolving credit facility secured primarily by our accounts receivable and inventory. Availability under the credit agreement fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. We amended this agreement inDecember 2018 to extend its maturity date by five years. The credit agreement includes covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As ofDecember 31, 2021 , we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the facility, were in compliance with all other covenants and had borrowing availability of$102.2 million of the$165.0 million credit commitment. OnJanuary 26, 2022 , we entered into a Third Amended and Restated Credit Agreement (the "Amended Facility"), withJPMorgan Chase Bank, N.A . as Administrative Agent and Syndication Agent andCapital One, National Association as Documentation Agent. The Amended Facility amends and restates the existing Second Amended and Restated Credit Agreement, dated as ofDecember 21, 2018 . The Amended Facility provides a revolving credit line of$125 million , subject to borrowing base availability, and extends the maturity of the Facility toJanuary 26, 2027 . The Amended Facility also provides the Company the option to increase the size of the facility up to an additional amount of$60 million .
Letters of Credit - At
Uses of Liquidity Capital Expenditures. Capital expenditures in the first half of fiscal 2022 were$3.7 million compared with$5.9 million in the prior year period. The decrease of$2.2 million from the prior year period related primarily to$1.3 million lower spending on retail design center openings, relocations and projection improvements, as well as the prior year expansion of our existingMaiden, North Carolina manufacturing campus and higher corporate infrastructure and land improvements in the prior year period. The expansion of our existingMaiden, North Carolina manufacturing campus, which will help increase overall capacity, is nearly complete and we expect to commence operations at the facility during the third quarter of fiscal 2022. Partially offsetting these decreases was an incremental$0.5 million spent during the first six months of fiscal 2022 compared to the prior year period on manufacturing plant upgrades, including investments in technology, to further increase our production capacity and efficiency. In the first half of fiscal 2022, 60% of our total capital expenditures were for manufacturing capital projects and 35% primarily related to updating existing design center projections, renovating retail service centers and installing additional technology within each design center, including new designer workstations and tablets. The remaining 5% was primarily for system development to further enhance existing workflows. We have no material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures. We expect our capital expenditures to accelerate during the second half of fiscal 2022 and should range between$12 million and$14 million as we further invest in technology, increase manufacturing capacity and open new or relocate design centers while also continuing to improve all our design centers projection. However, given the pace at which business conditions are evolving in response to the COVID-19 pandemic, we may adjust our level of capital expenditures throughout the remainder of fiscal 2022. 31 --------------------------------------------------------------------------------ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES Dividends. Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a strong history of returning capital to shareholders and continued this practice during the first half of fiscal 2022 by paying a special dividend of$0.75 per share and increasing the regular quarterly dividend by 16%, which together highlight the strength of our balance sheet and operating results. During the first half of fiscal 2022, we paid total cash dividends of$25.4 million . This total included a special dividend of$0.75 per share or$19.0 million , which our Board declared onAugust 3, 2021 and paid onAugust 31, 2021 to shareholders of record as ofAugust 17, 2021 . During the second quarter of fiscal 2022, our Board declared a regular quarterly cash dividend of$0.29 per share, payable onJanuary 5, 2022 to shareholders of record at the close of business onDecember 14, 2021 . No cash dividends were paid in the prior year first quarter as the Board had previously suspended the cash dividend due to the COVID-19 impact. However, onAugust 4, 2020 , our Board reinstated the regular quarterly cash dividend and declared a cash dividend, which was paid onOctober 22, 2020 and totaled$5.3 million . While we expect the Board to continue declaring regular quarterly cash dividends for the foreseeable future, it may discontinue doing so at any time. We will continue to monitor the pace of business as it relates to future dividends and any future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, subject to final determination by our Board. Share Repurchase Program. AtDecember 31, 2021 , we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our existing multi-year share repurchase program (the "Share Repurchase Program"). There were no share repurchases under our Share Repurchase Program during the first half of fiscal 2022 or fiscal 2021. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company's officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions while also maintaining financial flexibility in consideration of the COVID-19 pandemic.
Acquisitions. From time to time, we acquire design centers from our independent retailers in arm's length transactions. There were no independent retailer acquisitions in either period presented.
Material Cash Requirements from Contractual Obligations. Fluctuations in our operating results, levels of inventory on hand, operating lease commitments, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, the rate of written orders and net sales, levels of customer deposits on hand, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As disclosed in our 2021 Annual Report on Form 10-K, as ofJune 30, 2021 , we had total contractual obligations of$203.9 million , including$143.6 million related to our operating lease commitments and$50.2 million open purchase orders. Except for operating lease payments totaling$16.7 million made to our landlords, there were no other material changes, outside of the ordinary course of business, in our contractual obligations as previously disclosed in 2021 Annual Report on Form 10-K. Other Arrangements We do not utilize or employ any other arrangements in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations. We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.
Significant Accounting Policies
We describe our significant accounting policies in Note 3, Summary of
Significant Accounting Policies, in the notes to our consolidated financial
statements included in our 2021 Annual Report on Form 10-K. There have been no
changes in our significant accounting policies during the first six months of
fiscal 2022 from those disclosed in our 2021 Annual Report on Form 10-K.
Critical Accounting Estimates
We prepare our consolidated financial statements in conformity with GAAP. In
some cases, these principles require management to make difficult and subjective
judgments regarding uncertainties and, as a result, such estimates and
assumptions may significantly impact our financial results and disclosures. We
consider an accounting estimate to be critical if: (i) the accounting estimate
requires us to make assumptions about matters that were highly uncertain at the
time the accounting estimate was made, and (ii) changes in the estimate that are
reasonably likely to occur from period to period, or use of different estimates
that we reasonably could have used in the current period, would have a material
impact on our financial condition or results of operations. We base our
estimates on currently known facts and circumstances, prior experience and other
assumptions we believe to be reasonable. We use our best judgment in valuing
these estimates and may, as warranted, use external advice. Actual results could
differ from these estimates, assumptions, and judgments and these differences
could be significant. We make frequent comparisons throughout the year of actual
experience to our assumptions to reduce the likelihood of significant
adjustments and will record adjustments when differences are known.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIESWe discuss our critical accounting estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2022 from those disclosed in our 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.
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