Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:
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-
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Forward-Looking Statements
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-
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Executive Overview
|
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-
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Key Operating Metrics
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-
|
Results of Operations
|
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-
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Reconciliation of Non-GAAP Financial Measures
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-
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Liquidity
|
|
-
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Capital Resources
|
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-
|
Share Repurchase Program
|
|
-
|
Contractual Obligations
|
|
-
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Dividends
|
|
-
|
Off-Balance Sheet Arrangements and Other Commitments and Contingencies
|
|
-
|
Foreign Currency
|
|
-
|
Significant Accounting Policies and Critical Accounting Estimates
|
|
-
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Recent Accounting Pronouncements
|
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-
|
Business Outlook
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The following MD&A should be read in conjunction with our 2019 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors found in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “may,” “continue,” “project,” ”target,” “outlook,” “forecast,” “guidance,” variations of such words, and similar expressions and the negatives of such forward-looking words are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to management decisions and various assumptions about future events and are not guarantees of future performance. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risk factors and uncertainties including, but not limited to the following: a volatile retail environment and changing economic conditions may further adversely affect consumer demand and spending; global and local economic uncertainty may materially adversely affect our manufacturing operations or sources of merchandise and international operations; disruptions of our supply chain; changes in United States trade and tax policy; competition from overseas manufacturers and domestic retailers; failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner; our ability to maintain and enhance our brand; our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in higher transportation costs; fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production delays; our current and former manufacturing and retail operations and products are subject to increasingly stringent environment, health and safety requirements; the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors; reliance on information technology systems to process transactions, summarize results, and manage our business and that of certain independent retailers; disruptions in both our primary and back-up systems; product recalls or product safety concerns; 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; loss of key personnel; additional asset impairment charges that could reduce our profitability; access to consumer credit could be interrupted as a result of conditions outside of our control; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; changes to fiscal and tax policies; our operations present hazards and risks which may not be fully covered by insurance; possible failure to protect our intellectual property; and other factors described under Part I, Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K, and elsewhere herein.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.
Executive Overview
We are a leading interior design company and manufacturer and retailer of quality home furnishings. Founded over 87 years ago, today we are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East. We are vertically integrated from design through delivery, affording our clientele a value proposition of style, quality and price. We offer complementary interior design service to our clients and sell a full range of furniture products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail segment. We own and operate nine manufacturing facilities, including six manufacturing plants in the United States plus two plants in Mexico and one in Honduras.
Our business model is to maintain continued focus on (i) capitalizing on the strength of our interior design professionals and management in our retail design centers, (ii) communicating our messages with effective advertising and marketing campaigns, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to our design centers, (iv) investing in new technologies across key aspects of our vertically integrated business, and (v) leveraging the benefits of our vertical integration by maintaining manufacturing capacity in North America where we manufacture approximately 75% of our products.
Our competitive advantages arise from:
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providing fashionable high-quality products of the finest craftsmanship;
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●
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offering complimentary design service through approximately 2,000 motivated interior design professionals network-wide;
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●
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offering a wide array of custom products across our upholstery, case goods, and accent product categories;
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●
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enhancing our technology in all aspects of the business; and
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|
●
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leveraging our vertically integrated structure.
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We measure the performance of our wholesale and retail segments based on total net sales on a comparable period basis. We also measure wholesale orders booked on a comparable period basis. Wholesale orders booked reflect new orders placed with our wholesale segment from all sales channels, including our retail segment, independent retailers and contract customers. The frequency and timing of our promotional events can affect the comparability of orders booked during a given period.
Fiscal 2020 First Quarter in Review – We continued strengthening our product and marketing programs during the first three months of fiscal 2020 and believe we are well positioned for future growth. In September 2019, we completed the sale of our Passaic, New Jersey facility, to an independent third party, and received $12.4 million in cash less certain adjustments, including $0.9 million in selling and other closing costs. The resulting net gain of $11.5 million from this sale is reported within our wholesale segment operating results. This transaction, together with our cash provided by operating activities, increased our cash on hand at the end of the quarter by 120% to $45.9 million. While our wholesale orders from China declined 37.6% mainly due to the imposition of tariffs by China, our contract business, driven by the GSA contract, had a strong quarter with orders growing by 62.4%. Total wholesale orders excluding our China business increased 0.7%, and including the impact of decreased China orders, our total wholesale orders decreased 1.5% in the first quarter of fiscal 2020 compared with the same quarter last fiscal year.
Adjusted gross and operating margin expansion helped increase our adjusted diluted earnings per share in fiscal 2020 to $0.35, up 6.1% from $0.33 in the year ago first quarter. Consolidated net sales decreased 7.4% primarily due to lower sales to China and a 5.5% decrease in retail net sales. For the three months ended September 30, 2019, adjusted gross margin was 56.3%, up from 54.0% a year ago, due to improved retail and wholesale gross margin coupled with a change in the retail sales mix relative to total sales, which was 78.9% compared with 77.3% in the comparable prior year period. Adjusted operating expenses, as expressed as percentage of sales, increased to 49.3% compared with 47.7% a year ago primarily due to net sales decreasing 7.4% while adjusted operating expenses declined 4.4%. The effective income tax rate was 24.4% in the current quarter compared with 24.9%.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Key Operating Metrics
A summary of our key operating metrics is presented in the following table ($ in millions, except per share amounts).
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Three months ended
September 30,
|
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|
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2019
|
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|
% of Sales
|
|
|
2018
|
|
|
% of Sales
|
|
Net sales
|
|
$
|
173.9
|
|
|
|
|
|
|
$
|
187.8
|
|
|
|
|
|
Gross profit
|
|
$
|
93.8
|
|
|
|
53.9
|
%
|
|
$
|
101.5
|
|
|
|
54.0
|
%
|
Adjusted gross profit(1)
|
|
$
|
97.9
|
|
|
|
56.3
|
%
|
|
$
|
101.5
|
|
|
|
54.0
|
%
|
Operating income
|
|
$
|
18.6
|
|
|
|
10.7
|
%
|
|
$
|
11.8
|
|
|
|
6.3
|
%
|
Adjusted operating income(1)
|
|
$
|
12.2
|
|
|
|
7.0
|
%
|
|
$
|
11.8
|
|
|
|
6.3
|
%
|
Net income
|
|
$
|
14.1
|
|
|
|
8.1
|
%
|
|
$
|
8.8
|
|
|
|
4.7
|
%
|
Adjusted net income(1)
|
|
$
|
9.3
|
|
|
|
5.3
|
%
|
|
$
|
8.8
|
|
|
|
4.7
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%
|
Diluted EPS
|
|
$
|
0.53
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
|
|
Adjusted diluted EPS(1)
|
|
$
|
0.35
|
|
|
|
|
|
|
$
|
0.33
|
|
|
|
|
|
Cash flow from operating activities
|
|
$
|
23.4
|
|
|
|
|
|
|
$
|
24.4
|
|
|
|
|
|
(1)
|
Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.
|
A summary of changes from the applicable periods in the preceding fiscal year is presented in the following table.
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
|
(7.4
|
%)
|
|
|
3.6
|
%
|
Gross profit
|
|
|
(7.5
|
%)
|
|
|
1.1
|
%
|
Adjusted gross profit(1)
|
|
|
(3.5
|
%)
|
|
|
1.1
|
%
|
Operating income
|
|
|
58.0
|
%
|
|
|
2.2
|
%
|
Adjusted operating income(1)
|
|
|
3.5
|
%
|
|
|
(4.8
|
%)
|
Net income
|
|
|
59.6
|
%
|
|
|
19.2
|
%
|
Adjusted net income(1)
|
|
|
4.7
|
%
|
|
|
12.9
|
%
|
Diluted EPS
|
|
|
60.6
|
%
|
|
|
22.2
|
%
|
Adjusted diluted EPS(1)
|
|
|
6.1
|
%
|
|
|
17.9
|
%
|
Cash flow from operating activities
|
|
|
(4.3
|
%)
|
|
|
38.6
|
%
|
(1)
|
Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.
|
The components of consolidated net sales and operating income by business segment is presented in the following table ($ in millions).
|
|
Three months ended
September 30,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
% Chg
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
101.3
|
|
|
$
|
118.1
|
|
|
|
(14.2
|
%)
|
Retail segment
|
|
|
137.3
|
|
|
|
145.2
|
|
|
|
(5.5
|
%)
|
Elimination of intersegment sales
|
|
|
(64.7
|
)
|
|
|
(75.5
|
)
|
|
|
|
|
Consolidated net sales
|
|
$
|
173.9
|
|
|
$
|
187.8
|
|
|
|
(7.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
16.9
|
|
|
$
|
14.3
|
|
|
|
18.3
|
%
|
Retail segment
|
|
|
1.6
|
|
|
|
(1.6
|
)
|
|
|
200.3
|
%
|
Elimination of intercompany profit (a)
|
|
|
0.1
|
|
|
|
(0.9
|
)
|
|
|
|
|
Consolidated operating income
|
|
$
|
18.6
|
|
|
$
|
11.8
|
|
|
|
58.0
|
%
|
|
(a)
|
Represents the change in wholesale profit contained in Ethan Allen-operated design center inventory existing at the end of the period.
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
The following table shows selected design center location information.
|
|
Fiscal 2020
|
|
|
Fiscal 2019
|
|
|
|
Independent
|
|
|
Company-
|
|
|
|
|
|
|
Independent
|
|
|
Company-
|
|
|
|
|
|
|
|
retailers
|
|
|
operated
|
|
|
Total
|
|
|
retailers
|
|
|
operated
|
|
|
Total
|
|
Retail Design Center location activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1
|
|
|
158
|
|
|
|
144
|
|
|
|
302
|
|
|
|
148
|
|
|
|
148
|
|
|
|
296
|
|
New locations
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
Closures
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(8
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Transfers
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at September 30
|
|
|
156
|
|
|
|
145
|
|
|
|
301
|
|
|
|
153
|
|
|
|
147
|
|
|
|
300
|
|
Relocations (in new and closures)
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Design Center geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
38
|
|
|
|
139
|
|
|
|
177
|
|
|
|
43
|
|
|
|
141
|
|
|
|
184
|
|
Canada
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
China
|
|
|
100
|
|
|
|
-
|
|
|
|
100
|
|
|
|
92
|
|
|
|
-
|
|
|
|
92
|
|
Other Asia
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
Europe
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Middle East
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Total
|
|
|
156
|
|
|
|
145
|
|
|
|
301
|
|
|
|
153
|
|
|
|
147
|
|
|
|
300
|
|
Results of Operations
For an understanding of the significant factors that influenced our performance for the three months ended September 30, 2019 and 2018, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all comparisons in the following discussion are from the three-month period ended September 30, 2019 to the comparable prior fiscal year three-month period.
First Quarter ended September 30, 2019 compared with First Quarter ended September 30, 2018
Consolidated net sales were $173.9 million, a decrease of 7.4% or $13.9 million compared to the same prior year period. Net sales decreased by 14.2% for our wholesale segment and by 5.5% in our retail segment. There was a $4.7 million decrease in international sales from our combined retail and wholesale segments, which was primarily related to lower sales in China and Canada due to the economic uncertainty surrounding international trade disputes and a challenging global economy. Net sales to China were 49.4% lower in the first quarter of fiscal 2020 compared with the same quarter last fiscal year.
Wholesale net sales decreased 14.2% to $101.3 million. The lower net sales were primarily due to a decline in sales to China and to our North American retail network. Partially offsetting these declines was growth in contract sales, which grew $4.5 million year over year. The year over year increase in contract sales was primarily attributable to higher sales from the GSA contract. Our international net sales to independent retailers was 3.4% of our consolidated net sales compared to 5.3%.
Wholesale orders booked, which represents orders booked through all of our channels, during the first quarter of fiscal 2020 was down 1.5% compared with the same quarter last fiscal year. Wholesale orders from China declined 37.6% from a year ago mainly due to the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. Excluding orders from China, our total wholesale orders increased 0.7%, which was driven by continued growth in our contract business, including the GSA contract. We believe our new format of reporting on wholesale orders booked through all channels provides a more holistic view of our business than our previous reporting approach focusing on the change in only the company retail division written orders.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Retail net sales from Ethan Allen operated design centers decreased by $7.9 million, or 5.5%, to $137.3 million. There was a 5.3% decrease in net sales in the United States, while net sales from the Canadian design centers decreased 10.8%. These decreases were primarily due to softer order trends as consumers have been cautious with discretionary spending. There were 145 Company operated design centers at the end of the first quarter of fiscal 2020, two less than the 147 in the prior year period.
Gross profit decreased 7.5% to $93.8 million compared with the prior year period due to a decline in profit within our wholesale segment, while our retail segment grew slightly. Wholesale gross profit in fiscal 2020 was negatively impacted by lower sales volume during the past three months, partially offset by a change in product mix. Retail sales, as a percentage of total consolidated sales, were 78.9% in fiscal 2020 compared with 77.3% in the prior fiscal year, which favorably impacted our consolidated gross margin. Our fiscal 2020 adjusted gross margin improved to 56.3%, up from 54.0% in the prior year. Restructuring charges totaling $4.1 million, which included the write off of inventory, higher unfavorable manufacturing variances and incremental freight and relocation costs, negatively impacted our fiscal 2020 consolidated gross margin by 240 basis points.
Operating expenses decreased to $75.2 million, or 43.2% of net sales, compared with $89.7 million, or 47.7% of net sales, for the prior year period. The 16.2% decrease was primarily due to a gain of $11.5 million from the sale of the Passaic property during the first quarter of fiscal 2020. The gain on the sale is reported within restructuring charges. In addition to the gain on the sale, operating expenses were lower in fiscal 2020 due to lower retail depreciation expense and lower wholesale distribution costs from a lower volume of shipments.
Operating income totaled $18.6 million, or 10.7% of net sales, compared with $11.8 million, or 6.3% of net sales, for the prior year first quarter. The increase in operating income was driven by the $11.5 million gain on the sale of the Passaic property and higher retail sales as a percent of total consolidated sales partially offset by lower net sales. Adjusted operating margin in the first quarter of fiscal 2020 was 7.0%, an increase of 70 bps compared to 6.3% last year. The 70-basis point increase in adjusted operating margin was from lower depreciation expense and a decrease in wholesale distribution costs partially offset by lower net sales.
Wholesale operating income increased 18.3% to $16.9 million compared with $14.3 million for the prior year period. The increase was due to the $11.5 million gain on the sale of the Passaic property partially offset by $4.7 million in restructuring actions, including $4.1 million within cost of goods sold and $0.6 million within operating expenses during fiscal 2020. Adjusted wholesale operating income decreased 27.7% largely due to lower sales volume.
Retail operating income was $1.6 million, or 1.1% of net sales in the first quarter of fiscal 2020 compared with a loss of $1.6 million for the prior year period. Growth in operating income was driven by an improvement in our gross margin rate and lower depreciation partially offset by lower sales. The main factor contributing to the overall gross margin increase stems from improved retail price and promotion optimization.
Income tax expense was $4.6 million compared with $2.9 million a year ago. Our effective tax rate was 24.4% in the current year first quarter compared with 24.9%. The effective tax rate of 24.4% primarily includes a provision for income tax on the current quarter’s taxable income, including federal, state and local taxes, tax expense on the maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax positions. The year ago first quarter effective tax rate of 24.9% primarily includes tax expense on that quarter’s taxable income, tax expense on the cancelation of stock options and tax and interest expense on uncertain tax positions.
Net income was $14.1 million compared with $8.8 million for the prior year period, which resulted in $0.53 per diluted share compared with $0.33 in the prior year period. The gain on the sale of the Passaic property partially offset with other fiscal 2020 restructuring activities and corporate actions increased diluted EPS by $0.18. Adjusted diluted EPS of $0.35 in the current year first quarter represents 6.1% of growth over the prior year first quarter. This increase was driven by improved gross margin and cost containment.
Reconciliation of Non-GAAP Financial Measures
To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-GAAP financial measures including adjusted gross profit and margin, adjusted operating income, adjusted retail operating income and margin, adjusted wholesale operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are shown in tables below.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with U.S. GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with U.S. GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.
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
September 30,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
% Change
|
|
Consolidated Adjusted Gross Profit / Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Gross profit
|
|
$
|
93,794
|
|
|
$
|
101,450
|
|
|
|
(7.5
|
%)
|
Adjustments (pre-tax) *
|
|
|
4,140
|
|
|
|
-
|
|
|
|
|
|
Adjusted gross profit *
|
|
$
|
97,934
|
|
|
$
|
101,450
|
|
|
|
(3.5
|
%)
|
Adjusted gross margin *
|
|
|
56.3
|
%
|
|
|
54.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted Operating Income / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Operating income
|
|
$
|
18,641
|
|
|
$
|
11,799
|
|
|
|
58.0
|
%
|
Adjustments (pre-tax) *
|
|
|
(6,428
|
)
|
|
|
-
|
|
|
|
|
|
Adjusted operating income *
|
|
$
|
12,213
|
|
|
$
|
11,799
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
173,921
|
|
|
$
|
187,785
|
|
|
|
(7.4
|
%)
|
GAAP Operating margin
|
|
|
10.7
|
%
|
|
|
6.3
|
%
|
|
|
|
|
Adjusted operating margin *
|
|
|
7.0
|
%
|
|
|
6.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted Net Income / Adjusted Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Net income
|
|
$
|
14,106
|
|
|
$
|
8,840
|
|
|
|
59.6
|
%
|
Adjustments, net of tax *
|
|
|
(4,853
|
)
|
|
|
-
|
|
|
|
|
|
Adjusted net income
|
|
$
|
9,253
|
|
|
$
|
8,840
|
|
|
|
4.7
|
%
|
Diluted weighted average common shares
|
|
|
26,750
|
|
|
|
26,940
|
|
|
|
|
|
GAAP Diluted EPS
|
|
$
|
0.53
|
|
|
$
|
0.33
|
|
|
|
60.6
|
%
|
Adjusted diluted EPS *
|
|
$
|
0.35
|
|
|
$
|
0.33
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Adjusted Operating Income / Adjusted Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale GAAP operating income
|
|
$
|
16,928
|
|
|
$
|
14,315
|
|
|
|
18.3
|
%
|
Adjustments (pre-tax) *
|
|
|
(6,576
|
)
|
|
|
-
|
|
|
|
|
|
Adjusted wholesale operating income *
|
|
$
|
10,352
|
|
|
$
|
14,315
|
|
|
|
(27.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net sales
|
|
$
|
101,329
|
|
|
$
|
118,072
|
|
|
|
(14.2
|
%)
|
Wholesale GAAP operating margin
|
|
|
16.7
|
%
|
|
|
12.1
|
%
|
|
|
|
|
Adjusted wholesale operating margin *
|
|
|
10.2
|
%
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Adjusted Operating Income / Adjusted Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail GAAP operating income
|
|
$
|
1,564
|
|
|
$
|
(1,559
|
)
|
|
|
200.3
|
%
|
Adjustments (pre-tax) *
|
|
|
148
|
|
|
|
-
|
|
|
|
|
|
Adjusted retail operating income *
|
|
$
|
1,712
|
|
|
$
|
(1,559
|
)
|
|
|
209.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail net sales
|
|
$
|
137,266
|
|
|
$
|
145,214
|
|
|
|
(5.5
|
%)
|
Retail GAAP operating margin
|
|
|
1.1
|
%
|
|
|
(1.1
|
%)
|
|
|
|
|
Adjusted retail operating margin *
|
|
|
1.2
|
%
|
|
|
(1.1
|
%)
|
|
|
|
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
* Adjustments to reported U.S. GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following (in thousands):
|
|
Three months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Inventory write-downs and manufacturing overhead costs
|
|
$
|
4,140
|
|
|
$
|
-
|
|
Adjustments to gross profit
|
|
$
|
4,140
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, including inventory write-downs (wholesale)
|
|
$
|
4,771
|
|
|
$
|
-
|
|
Gain on sale of Passaic, New Jersey property (wholesale)
|
|
|
(11,497
|
)
|
|
|
-
|
|
Other professional fees incurred (wholesale)
|
|
|
150
|
|
|
|
-
|
|
Retail acquisition costs and other restructuring charges (retail)
|
|
|
148
|
|
|
|
-
|
|
Adjustments to operating income
|
|
$
|
(6,428
|
)
|
|
$
|
-
|
|
Adjustments to income before income taxes
|
|
$
|
(6,428
|
)
|
|
$
|
-
|
|
Related income tax effects (1)
|
|
|
1,575
|
|
|
|
-
|
|
Adjustments to net income
|
|
$
|
(4,853
|
)
|
|
$
|
-
|
|
(1)
|
Calculated using a rate of 24.4% in fiscal 2020 and 24.5% in fiscal 2019.
|
Liquidity
At September 30, 2019, we held cash and cash equivalents of $45.9 million compared with $20.8 million at June 30, 2019. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under our credit facility. Cash and cash equivalents aggregated to 7.0% of our total assets at September 30, 2019, compared with 7.2% of our total assets a year ago and 4.1% at June 30, 2019. Our cash and cash equivalents increased $25.1 million during the first quarter of fiscal 2020 due to net cash provided by operating activities of $23.4 million and proceeds from the sale of our Passaic property $11.6 million, partially offset by $5.1 million in dividend payments, $3.4 million of capital expenditures and $1.3 million from design center acquisitions.
A summary of net cash provided by (used in) operating, investing, and financing activities for the three months ended September 30, 2019 and 2018 is provided below (in millions):
|
|
Three months ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Net income plus other non-cash items
|
|
$
|
20.2
|
|
|
$
|
14.5
|
|
Restructuring payments
|
|
|
(4.1
|
)
|
|
|
-
|
|
Change in working capital
|
|
|
7.3
|
|
|
|
9.9
|
|
Total provided by operating activities
|
|
$
|
23.4
|
|
|
$
|
24.4
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
|
|
Proceeds from sale of the Passaic property
|
|
$
|
11.6
|
|
|
$
|
-
|
|
Capital expenditures
|
|
|
(3.4
|
)
|
|
|
(2.8
|
)
|
Acquisitions, net of cash acquired
|
|
|
(1.3
|
)
|
|
|
-
|
|
Other investing activities
|
|
|
-
|
|
|
|
0.1
|
|
Total provided by (used in) investing activities
|
|
$
|
6.9
|
|
|
$
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
Payment of cash dividends
|
|
$
|
(5.1
|
)
|
|
$
|
(5.1
|
)
|
Other financing activities
|
|
|
(0.1
|
)
|
|
|
0.5
|
|
Total (used in) financing activities
|
|
$
|
(5.2
|
)
|
|
$
|
(4.6
|
)
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Cash Provided by (Used in) Operating Activities. Year-to-date cash generated from operating activities was $23.4 million, a decrease of $1.0 million primarily due to $4.1 million in restructuring payments made in connection with our previously announced optimization of manufacturing and logistics activities. Restructuring payments included $2.0 million in severance, $1.1 million of manufacturing overhead costs and $1.0 million of other exit and relocation costs. These payments were partially offset by higher net income and non-cash items. Working capital was $7.3 million, down from $9.9 million a year ago primarily due to timing of accounts payable and accrued expenses partially offset by improved inventory management and higher retail customer deposits.
Cash Provided by (Used in) Investing Activities. Year-to-date cash of $6.9 million was provided by investing activities due to cash proceeds of $11.6 million received from the sale of the Passaic property partially offset by capital expenditures of $3.4 million and $1.3 million from design center acquisitions. In fiscal 2020, approximately 66% of our total capital expenditures related to opening new and relocating design centers in desirable locations, updating presentations and floor plans and the consolidation of certain design centers and service centers. Cash paid to acquire design centers from our independent retailers in an arm’s length transaction totaled $1.3 million during the first three months of fiscal 2020 compared with none a year ago.
Cash Provided by (Used in) Financing Activities. Year-to-date $5.2 million was used in financing activities compared with $4.6 million of cash used in the prior year comparable period. The increase year over year was due to $0.6 million in proceeds received from stock option exercises in the prior year first quarter. During both periods presented we paid cash dividends of $0.19 per share, totaling $5.1 million. We have continuously paid regular quarterly dividends for every quarter since 1996 and expect to continue to do so as economic conditions and liquidity permit.
We believe that our cash flow from operations, together with our other available sources of liquidity including the credit facility, will be sufficient to fund changes in working capital, necessary capital expenditures, acquisition activity, the payment of dividends and other cash requirements.
Capital Resources
Capital Expenditures - Capital expenditures in the first quarter of fiscal 2020 were $3.4 million, compared with $2.8 million in the prior year period. Capital expenditures of $2.3 million, or 66%, were primarily related to retail design center improvements. We have no material contractual commitments outstanding for future capital expenditures
Capital Needs - During December 2018 we entered into a five-year, $165 million senior secured revolving credit facility, which amended and restated the previously existing facility. For a detailed discussion of our debt obligations, see Note 8 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Letters of Credit - At September 30, 2019 and June 30, 2019, there was $5.9 million and $6.1 million, respectively, of standby letters of credit outstanding under the revolving credit facility.
Total availability under the Facility was $148.4 million at September 30, 2019 and $158.9 million at June 30, 2019. At both September 30, 2019 and June 30, 2019, we were in compliance with all the covenants under the revolving credit facility.
Share Repurchase Program
We may from time to time make repurchases in the open market and privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. There were no share repurchases under the program during the first three months of fiscal 2020. At September 30, 2019, we had a remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program.
Contractual Obligations
Fluctuations in our operating results, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As of June 30, 2019, we had total contractual obligations of $207.0 million, of which $169.9 million related to our operating lease commitments. Upon adoption of ASU 2016-02, we recognized these operating lease liabilities on our consolidated balance sheet. There were no other material changes in our contractual obligations during the first three months of fiscal 2020.
Dividends
On July 25, 2019, our Board of Directors approved a regular quarterly dividend of $0.21 per share. The $0.02 per share or 10.5% increase highlights our continued commitment to returning value to shareholders. The cash dividend of $5.6 million was paid on October 25, 2019, to common stockholders of record at the close of business on October 10, 2019. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and is subject to final determination by our Board of Directors.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Off-Balance Sheet Arrangements and Other Commitments and Contingencies
We do not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments (other than as specified below), or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.
We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.
Foreign Currency
Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in U.S. dollars. The financial statements of these foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the value of foreign currencies did not have a material impact during any of the periods presented in this Quarterly Report on Form 10-Q.
Significant Accounting Policies and Critical Accounting Estimates
We describe our significant accounting policies in Note 3, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our 2019 Annual Report on Form 10-K. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Annual Report on Form 10-K.
We implemented ASU 2016-02 in the first quarter of fiscal 2020. There have been no other changes in our significant accounting policies or critical accounting estimates during the first three months of fiscal 2020 from those disclosed in our 2019 Annual Report on Form 10-K. Refer to Note 6, Leases, for further details on the adoption of ASU 2016-02.
Recent Accounting Pronouncements
See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.
Business Outlook
With our vertical enterprise well-positioned, we maintain a cautiously optimistic outlook. We continue to strengthen our talent across the Company. We believe our network of professionally-trained interior design professionals differentiate us from our competitors.
We are continuing our marketing focus on providing fresh and relevant product offerings, enhancing the projection of our design centers and deploying effective advertising across various mediums. We will also continue to leverage the use of technology combined with personal service within our retail network and online through ethanallen.com.
We continue to strengthen our vertically integrated structure from the concept of idea, to engineering, to manufacturing, to retail and logistics. We intend to maintain our manufacturing capabilities in North America, which we believe is a long-term competitive advantage that will allow us to advance our objectives of maintaining fast order delivery, exceptional quality and improving capacity, to ship stocked and custom made-to-order items more quickly, which in turn will allow us to grow our business.
The Company also maintains its overall dedication to ethical and accountable business practices. Our corporate social responsibility commitments include the areas of environmental sustainability and community connections. We believe that these commitments create value for our stockholders and help position us to continuously improve business performance. Our strategy focuses our efforts on those areas most significant to our business, including health and safety, environmental stewardship, community and stakeholder engagement, human rights and transparency. Our 2019 Corporate Responsibility Report is available at www.ethanallen.com/corporate-responsibility.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
We expect the home furnishings industry to remain extremely competitive with respect to both the sourcing of products and the wholesale and retail sale of those products for the foreseeable future. Domestic manufacturers continue to face pricing pressures because of the lower manufacturing costs on imports, particularly from Asia. While we also utilize overseas sourcing for approximately 25% of our products, we choose to differentiate ourselves by maintaining a substantial North American manufacturing base, the majority of which is located in the United States. This structure enables us to leverage our vertically integrated structure to our advantage. We continue to believe that a balanced approach to product sourcing, which includes our own North American manufacturing of approximately 75% of our product offerings coupled with the import of other selected products, provides the greatest degree of flexibility, lower inventory levels, and short lead times and is the most effective approach to ensuring that acceptable levels of quality and service are maintained.
In October 2019 we introduced the Ethan Allen Member Program, an exclusive new membership program that reimagines and simplifies the shopping experience. For a $100 annual fee, the Member Program provides members 20% everyday savings on all styles and free in-home delivery. Members who are Ethan Allen Platinum Card cardholders also receive special 24-month financing.