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 and 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. Unless otherwise noted, all comparisons in the following discussion are from the three and six month periods ended December 31, 2019 to the three and six month periods in the prior year.
Our MD&A is presented in the following sections:
|
-
|
Forward-Looking Statements
|
|
-
|
Executive Overview
|
|
-
|
Key Operating Metrics
|
|
-
|
Results of Operations
|
|
-
|
Reconciliation of Non-GAAP Financial Measures
|
|
-
|
Liquidity
|
|
-
|
Capital Resources
|
|
-
|
Share Repurchase Program
|
|
-
|
Contractual Obligations
|
|
-
|
Dividends
|
|
-
|
Off-Balance Sheet Arrangements and Other Commitments and Contingencies
|
|
-
|
Foreign Currency
|
|
-
|
Significant Accounting Policies and Critical Accounting Estimates
|
|
-
|
Recent Accounting Pronouncements
|
|
-
|
Business Outlook
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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; failure to successfully transition from a promotional to a membership model; and other factors disclosed in Part I, Item 1A. Risk Factors in our 2019 Annual Report on Form 10-K, and elsewhere here in this Quarterly Report on Form 10-Q.
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 88 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 customers 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, two manufacturing plants in Mexico and one manufacturing plant 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:
|
●
|
providing fashionable high-quality products of the finest craftsmanship;
|
|
●
|
offering complimentary design service through approximately 2,000 motivated interior design professionals network-wide;
|
|
●
|
offering a wide array of custom products across our upholstery, case goods, and accent product categories;
|
|
●
|
enhancing our technology in all aspects of the business; and
|
|
●
|
leveraging our vertically integrated structure.
|
We assess 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. Wholesale orders booked vary depending upon a variety of factors, including our product offerings, store openings, shifts in the timing of holidays, promotional events and the timing and extent of our realization of the costs and benefits of our numerous strategic initiatives, including the recent transition to a membership model, among other things. As a result of these factors, comparability of our wholesale orders booked during any period to period comparison may be affected.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Introduction of Membership Model – In October 2019 we introduced the Ethan Allen Member Program, an exclusive membership program providing our customers a new way to make furnishing their home easier and more affordable. For an annual fee of $100, the Ethan Allen Member Program offers special members-only pricing, free shipping and white glove in-home delivery, and in our United States design centers, access to preferred financing plans. We believe that transitioning our business from a promotional to membership model will benefit our customers, enhance our brand and enable our team of about 1,500 North American interior designers and vertically integrated operations to operate more efficiently in order to improve our operating margins. The Member Program allows our interior designers to create design solutions that best satisfy the customer’s needs using our entire selection of product offerings at special member savings, as compared to our promotional model which focused on just those items that were on sale. The Member Program was launched in October with a strong advertising campaign utilizing direct mail, television and digital mediums. Specifically, we believe some of the benefits of the membership model will include:
|
●
|
Improved customer experience – our interior design professionals can now work with customers based on their timeline and project deadlines, as opposed to our prior promotional calendar. We believe this has the potential to lead to larger overall sales transactions for individual customer design projects.
|
|
●
|
Improved operational costs – the volume of sales, orders and shipments in our business under the prior promotional model was characterized by large spikes in customer orders based upon promotional events followed by lower orders and sales after the end of an event. This buying pattern also affected numerous other aspects of our business, including retail staffing and costs to service the increased number of customers during peak sales events. Likewise, significant fluctuations in sales had downstream implications for our manufacturing and production, shipment to the distribution centers and final delivery to customers. All of these aspects of our operations are experiencing improved efficiencies as a result of the membership model whereby sales are more evenly distributed throughout the year compared to the prior model.
|
During this initial year of transition into the Member Program, we expect net sales and related operating income to be negatively impacted due to the selling cycle with members being longer without the urgency created by promotional deadlines, the reduction of delivery fee revenue and the timing of recognizing membership fees over a one-year period.
Fiscal 2020 Second Quarter in Review – Our vertical structure continues to provide strong operating leverage that allows us to consistently return value to our shareholders through our regular quarterly dividend, periodic special cash dividends and share repurchases. During the second quarter ended December 31, 2019, we paid $5.6 million in cash dividends and repurchased 545,727 shares, representing 2.1% of our outstanding shares. We were pleased with the favorable customer response to the Ethan Allen Member Program, which launched in October 2019. As expected, sales and operating income during the second quarter were negatively impacted during the transition period as we moved from a promotional to a membership model. While our wholesale orders, which reflects sales through all our channels, decreased 21.8% from a year ago, we realized sequential improvement in orders each month during the second quarter, with October reflecting a decrease to the prior year, November reflecting a lesser decrease and December orders increasing year over year. As the Member Program continues to gain momentum, we have a strong marketing program planned, starting with a direct mail magazine being distributed in January 2020 to 2.5 million households.
Consolidated net sales decreased 11.5% due to lower wholesale sales and a 12.2% decrease in retail net sales. For the three months ended December 31, 2019, gross margin was 55.9%, up from 55.2% a year ago, due to improved retail and wholesale gross margin. Operating expenses, as a percentage of sales, increased to 50.6% compared with 47.0% a year ago primarily due to net sales decreasing 11.5% while operating expenses declined 4.8%. The effective income tax rate was 23.5% in the current quarter compared with 25.1% a year ago.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Key Operating Metrics
A summary of our key operating metrics is presented in the following table ($ in millions, except per share amounts).
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
|
|
2019
|
|
|
% of Sales
|
|
|
2018
|
|
|
% of Sales
|
|
|
2019
|
|
|
% of Sales
|
|
|
2018
|
|
|
% of Sales
|
|
Net sales
|
|
$
|
174.6
|
|
|
|
|
|
|
$
|
197.2
|
|
|
|
|
|
|
$
|
348.5
|
|
|
|
|
|
|
$
|
384.9
|
|
|
|
|
|
Gross profit
|
|
$
|
97.5
|
|
|
|
55.9
|
%
|
|
$
|
108.9
|
|
|
|
55.2
|
%
|
|
$
|
191.3
|
|
|
|
54.9
|
%
|
|
$
|
210.3
|
|
|
|
54.6
|
%
|
Adjusted gross profit(1)
|
|
$
|
97.9
|
|
|
|
56.1
|
%
|
|
$
|
108.9
|
|
|
|
55.2
|
%
|
|
$
|
195.8
|
|
|
|
56.2
|
%
|
|
$
|
210.3
|
|
|
|
54.6
|
%
|
Operating income
|
|
$
|
9.2
|
|
|
|
5.3
|
%
|
|
$
|
16.1
|
|
|
|
8.2
|
%
|
|
$
|
27.8
|
|
|
|
8.0
|
%
|
|
$
|
27.9
|
|
|
|
7.3
|
%
|
Adjusted operating income(1)
|
|
$
|
9.5
|
|
|
|
5.4
|
%
|
|
$
|
16.4
|
|
|
|
8.3
|
%
|
|
$
|
21.7
|
|
|
|
6.2
|
%
|
|
$
|
28.2
|
|
|
|
7.3
|
%
|
Net income
|
|
$
|
7.1
|
|
|
|
4.1
|
%
|
|
$
|
12.2
|
|
|
|
6.2
|
%
|
|
$
|
21.2
|
|
|
|
6.1
|
%
|
|
$
|
21.0
|
|
|
|
5.5
|
%
|
Adjusted net income(1)
|
|
$
|
7.3
|
|
|
|
4.2
|
%
|
|
$
|
12.4
|
|
|
|
6.3
|
%
|
|
$
|
16.6
|
|
|
|
4.7
|
%
|
|
$
|
21.3
|
|
|
|
5.5
|
%
|
Diluted EPS
|
|
$
|
0.26
|
|
|
|
|
|
|
$
|
0.45
|
|
|
|
|
|
|
$
|
0.79
|
|
|
|
0.2
|
%
|
|
$
|
0.78
|
|
|
|
|
|
Adjusted diluted EPS(1)
|
|
$
|
0.27
|
|
|
|
|
|
|
$
|
0.46
|
|
|
|
|
|
|
$
|
0.62
|
|
|
|
0.2
|
%
|
|
$
|
0.79
|
|
|
|
|
|
Cash flow from operating activities
|
|
$
|
(0.0
|
)
|
|
|
|
|
|
$
|
7.0
|
|
|
|
|
|
|
$
|
23.4
|
|
|
|
|
|
|
$
|
31.5
|
|
|
|
|
|
(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.
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
A summary of changes from the applicable periods in the preceding fiscal year is presented in the following table.
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
|
(11.5
|
%)
|
|
|
(0.7
|
%)
|
|
|
(9.5
|
%)
|
|
|
1.4
|
%
|
Gross profit
|
|
|
(10.4
|
%)
|
|
|
1.0
|
%
|
|
|
(9.0
|
%)
|
|
|
1.1
|
%
|
Adjusted gross profit(1)
|
|
|
(10.1
|
%)
|
|
|
1.0
|
%
|
|
|
(6.9
|
%)
|
|
|
1.1
|
%
|
Operating income
|
|
|
(42.9
|
%)
|
|
|
(8.0
|
%)
|
|
|
(0.3
|
%)
|
|
|
(4.0
|
%)
|
Adjusted operating income(1)
|
|
|
(42.2
|
%)
|
|
|
(4.6
|
%)
|
|
|
(23.1
|
%)
|
|
|
(4.7
|
%)
|
Net income
|
|
|
(41.9
|
%)
|
|
|
(18.0
|
%)
|
|
|
0.8
|
%
|
|
|
(5.6
|
%)
|
Adjusted net income(1)
|
|
|
(41.2
|
%)
|
|
|
(15.2
|
%)
|
|
|
(22.1
|
%)
|
|
|
(6.3
|
%)
|
Diluted EPS
|
|
|
(40.0
|
%)
|
|
|
(16.7
|
%)
|
|
|
1.3
|
%
|
|
|
(2.5
|
%)
|
Adjusted diluted EPS(1)
|
|
|
(41.3
|
%)
|
|
|
(13.2
|
%)
|
|
|
(21.5
|
%)
|
|
|
(3.7
|
%)
|
Cash flow from operating activities
|
|
|
(100.1
|
%)
|
|
|
302.3
|
%
|
|
|
(25.7
|
%)
|
|
|
122.4
|
%
|
(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.
|
The components of consolidated net sales and operating income by business segment is presented in the following table ($ in millions).
|
|
Three months ended
December 31,
|
|
|
|
|
|
|
Six months ended
December 31,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
% Chg
|
|
|
2019
|
|
|
2018
|
|
|
% Chg
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
91.9
|
|
|
$
|
107.7
|
|
|
|
(14.6
|
%)
|
|
$
|
193.2
|
|
|
$
|
225.7
|
|
|
|
(14.4
|
%)
|
Retail segment
|
|
|
139.1
|
|
|
|
158.5
|
|
|
|
(12.2
|
%)
|
|
|
276.4
|
|
|
|
303.7
|
|
|
|
(9.0
|
%)
|
Elimination of intersegment sales
|
|
|
(56.4
|
)
|
|
|
(69.0
|
)
|
|
|
|
|
|
|
(121.1
|
)
|
|
|
(144.5
|
)
|
|
|
|
|
Consolidated net sales
|
|
$
|
174.6
|
|
|
$
|
197.2
|
|
|
|
(11.5
|
%)
|
|
$
|
348.5
|
|
|
$
|
384.9
|
|
|
|
(9.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale segment
|
|
$
|
5.7
|
|
|
$
|
8.8
|
|
|
|
(35.0
|
%)
|
|
$
|
22.7
|
|
|
$
|
23.1
|
|
|
|
(2.1
|
%)
|
Retail segment
|
|
|
(0.1
|
)
|
|
|
3.3
|
|
|
|
(104.1
|
%)
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
(18.4
|
%)
|
Elimination of intercompany profit (1)
|
|
|
3.6
|
|
|
|
4.0
|
|
|
|
|
|
|
|
3.8
|
|
|
|
3.0
|
|
|
|
|
|
Consolidated operating income
|
|
$
|
9.2
|
|
|
$
|
16.1
|
|
|
|
(42.9
|
%)
|
|
$
|
27.8
|
|
|
$
|
27.9
|
|
|
|
(0.3
|
%)
|
(1)
|
Represents the change in wholesale profit contained in the retail segment 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 activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at July 1
|
|
|
158
|
|
|
|
144
|
|
|
|
302
|
|
|
|
148
|
|
|
|
148
|
|
|
|
296
|
|
New locations
|
|
|
9
|
|
|
|
5
|
|
|
|
14
|
|
|
|
13
|
|
|
|
1
|
|
|
|
14
|
|
Closures
|
|
|
(8
|
)
|
|
|
(6
|
)
|
|
|
(14
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(5
|
)
|
Transfers
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
Balance at December 31
|
|
|
158
|
|
|
|
144
|
|
|
|
302
|
|
|
|
159
|
|
|
|
146
|
|
|
|
305
|
|
Relocations (in new and closures)
|
|
|
1
|
|
|
|
4
|
|
|
|
5
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Design Center geographic locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
36
|
|
|
|
138
|
|
|
|
174
|
|
|
|
42
|
|
|
|
140
|
|
|
|
182
|
|
Canada
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
China
|
|
|
104
|
|
|
|
-
|
|
|
|
104
|
|
|
|
98
|
|
|
|
-
|
|
|
|
98
|
|
Other Asia
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Europe
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Middle East
|
|
|
6
|
|
|
|
-
|
|
|
|
6
|
|
|
|
7
|
|
|
|
-
|
|
|
|
7
|
|
Total
|
|
|
158
|
|
|
|
144
|
|
|
|
302
|
|
|
|
159
|
|
|
|
146
|
|
|
|
305
|
|
Results of Operations
Second Quarter ended December 31, 2019 compared with Second Quarter ended December 31, 2018
Consolidated net sales were $174.6 million, a decrease of 11.5% compared to the same prior year period. Net sales decreased by 14.6% for our wholesale segment and by 12.2% for our retail segment. Net sales in the second quarter ended December 31, 2019 were negatively impacted as a result of our ongoing transition from a promotional to a membership model as evidenced by a 21.8% decrease in wholesale orders, which led to lower wholesale shipments. In addition, there was a $4.2 million decrease in international sales primarily related to lower sales in China and Canada due to a challenging global economy.
Wholesale net sales decreased 14.6% to $91.9 million primarily due to a 45.1% decrease in sales to China and a 24.6% decline in sales to our North American retail network. Partially offsetting these declines was growth in contract sales, which grew 66.9% year over year. The year over year increase in contract sales was attributable to continued growth in sales from the United States government General Services Administration (“GSA”) contract.
Wholesale orders booked, which represents orders booked through all of our channels, was down 21.8% compared with the second quarter last year. Wholesale orders from China declined 69.3% from a year ago mainly due to global economic uncertainty. Excluding orders from China, our total wholesale orders decreased 17.9%, which was primarily the result of the transition to the membership model.
Retail net sales from Ethan Allen operated design centers decreased by $19.4 million, or 12.2%, to $139.1 million. There was a 12.3% decrease in net sales in the United States, while net sales from Canadian design centers decreased 11.8%. These decreases were primarily due to the transition to the membership model combined with softer order trends as consumers have been cautious with discretionary spending. There were 144 Company operated design centers at the end of the second quarter of fiscal 2020, compared to 146 in the prior year period as we continue to relocate and open new locations while closing older locations.
Gross profit decreased 10.4% to $97.5 million compared with the prior year period due to lower sales volumes in both our wholesale and retail segments combined with a change in product mix, partially offset by improved gross margins. Retail sales, as a percentage of total consolidated sales, was 79.7% in the current year second quarter compared with 80.4% a year ago, which change in mix negatively impacted our consolidated gross margin. Our fiscal 2020 gross margin improved to 55.9%, up from 55.2% in the prior year, primarily due to retail gross margin increasing from improved retail price optimization and wholesale gross margin expansion due to realizing efficiencies from our previously announced restructuring initiatives. Restructuring charges of $0.4 million negatively impacted our consolidated gross margin by 20 basis points.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Operating expenses decreased to $88.3 million, or 50.6% of net sales, compared with $92.7 million, or 47.0% of net sales, for the prior year period. The 4.8% decrease was primarily due to lower retail selling costs and lower general and administrative costs partially offset by higher wholesale advertising costs. Retail selling expenses decreased due to warehouse and delivery expenses decreasing, along with other reduced variable selling expenses, from the 12.2% reduction in retail net sales. General and administrative expenses decreased primarily due to lower wholesale compensation costs coupled with lower depreciation, occupancy costs and regional management charges within the retail segment. Wholesale selling costs increased due to television advertising costs during the quarter.
Operating income totaled $9.2 million, or 5.3% of net sales, compared with $16.1 million, or 8.2% of net sales, for the prior year second quarter. The decrease in operating income was driven by the 11.5% decline in consolidated net sales, which negatively impacted gross profit by 10.4% combined with a decrease in the retail/wholesale product mix and higher selling costs from television advertising spend. These decreases were partially offset by improved expense management and a gross margin improvement, which rose 70 basis points year over year.
Wholesale operating income decreased 35.0% to $5.7 million compared with $8.8 million for the prior year period primarily due to the decrease in net sales.
Retail operating loss was $0.1 million compared with operating income of $3.3 million for the prior year period. Operating margin decreased 220 basis points due to the 12.2% reduction in net sales partially offset by improved gross margin and a 4.5% decrease in operating expenses.
Income tax expense decreased to $2.2 million compared with $4.1 million a year ago due to the $7.0 million decrease in income before income taxes. Our effective tax rate was 23.5% in the current year second quarter compared with 25.1%. The effective tax rate of 23.5% primarily includes a provision for income tax on the current quarter’s taxable income, including federal, state and local taxes and tax and interest expense on uncertain tax positions. The year ago second quarter effective tax rate of 25.1% primarily includes tax expense on that quarter’s taxable income, tax expense on cancelations and exercises of stock options and tax and interest expense on uncertain tax positions.
Net income was $7.1 million compared with $12.2 million for the prior year period, which resulted in $0.27 per diluted share compared with $0.45 in the prior year period. Adjusted diluted EPS of $0.27 in the current year second quarter represents a decrease of 41.3% over the prior year second quarter adjusted diluted EPS of $0.46. This decrease was primarily from sales and operating income being negatively impacted during the quarter as we move from a promotional to membership model combined with retail consumers being cautious with discretionary spending.
Six Months ended December 31, 2019 compared with Six Months ended December 31, 2018
Consolidated net sales were $348.5 million, a decrease of 9.5% or $36.4 million compared with the same prior year period. Net sales decreased by 14.4% within our wholesale segment and by 9.0% in our retail segment. There was an $8.8 million decrease in international sales primarily related to lower sales in China and Canada due to a challenging global economy. Net sales to China were 47.4% lower in the current year compared with the same period last fiscal year. Softer order trends from consumers and the ongoing transition from a promotional sales model to a membership model negatively impacted our fiscal 2020 net sales.
Wholesale net sales decreased 14.4% to $193.2 million. The lower net sales were primarily due to a decline in sales to China and to our North American retail network combined with the impact from the transition to the membership model, which caused decreases in orders and subsequent shipments within our case goods, upholstery and home accents product lines. Partially offsetting these declines was growth in contract sales, which grew 64.8% year over year. The year over year increase in contract sales was attributable to continued growth in sales from the GSA contract.
Wholesale orders booked during fiscal 2020 was down 10.5% compared with the same period last fiscal year. Wholesale orders from China declined 53.8% 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 decreased 7.5%, primarily as the result of the transition to the membership model. These decreases were partially offset by continued growth in our contract business, including the GSA contract.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Retail net sales from Ethan Allen operated design centers decreased by $27.4 million, or 9.0%, to $276.4 million. There was an 8.9% decrease in net sales in the United States and a 11.3% decrease in Canada. These decreases were primarily due to softer order trends as consumers have been cautious with discretionary spending combined with the shift to the membership model. There were 144 Company operated design centers at the end of the period, two less than the 146 in the prior year period.
Gross profit decreased 9.0% to $191.3 million compared with the prior year period due to declines within both our wholesale and retail segments. Wholesale gross profit was negatively impacted by lower sales volume. Retail sales, as a percentage of total consolidated sales, were 79.3% in fiscal 2020 compared with 78.9% in the prior fiscal year, which mix favorably impacted our year-to-date consolidated gross margin. Our fiscal 2020 adjusted gross margin improved to 56.2%, up from 54.6% in the prior year. Restructuring charges negatively impacted our fiscal 2020 consolidated gross margin by 130 basis points.
Operating expenses decreased to $163.5 million, or 46.9% of net sales, compared with $182.4 million, or 47.4% of net sales, for the prior year period. The 10.4% 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. 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 $27.8 million, or 8.0% of net sales, compared with $27.9 million, or 7.3% of net sales, for the prior year period. Adjusted operating income in the first half of fiscal 2020, which excludes the $11.5 million gain on the sale of the Passaic property and $5.0 million of other restructuring charges, was $21.7 million, a decrease of 23.1% compared to last year. The adjusted operating income decrease was driven by the 9.5% decline in consolidated net sales combined with higher selling costs from television advertising spend.
Wholesale operating income decreased 2.1% to $22.7 million compared with $23.1 million for the prior year period. The decrease was due to the 14.6% decrease in net sales and higher selling costs partially offset by the $11.5 million gain on the sale of the Passaic property. Adjusted wholesale operating income decreased 29.5% largely due to lower sales volume and television advertising spend.
Retail operating income was $1.4 million, or 0.5% of net sales in the current period compared with $1.8 million for the prior year period. A higher gross margin rate and lower depreciation were offset by lower sales.
Income tax expense was $6.7 million compared with $7.0 million a year ago. Our effective tax rate was 24.1% in the current year first half compared with 25.0%. The effective tax rate of 24.1% primarily includes a provision for income tax on the current year’s taxable income and tax and interest expense on uncertain tax positions. The year ago effective tax rate of 25.0% primarily includes tax expense on that year’s taxable income, tax expense on cancelations and exercises of stock options and tax and interest expense on uncertain tax positions.
Net income was $21.2 million compared with $21.0 million for the prior year period, which resulted in $0.79 per diluted share compared with $0.78 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 $0.17. Adjusted diluted EPS of $0.62 in the current year represents a decrease of 21.5% over the prior year.
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.
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.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 U.S. GAAP financial measures.
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Three months ended
|
|
|
|
|
|
|
Six months ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
% Chg
|
|
|
2019
|
|
|
2018
|
|
|
% Chg
|
|
Consolidated Adjusted Gross Profit / Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Gross profit
|
|
$
|
97,521
|
|
|
$
|
108,860
|
|
|
|
(10.4
|
%)
|
|
$
|
191,315
|
|
|
$
|
210,310
|
|
|
|
(9.0
|
%)
|
Adjustments (pre-tax) *
|
|
|
389
|
|
|
|
-
|
|
|
|
|
|
|
|
4,529
|
|
|
|
-
|
|
|
|
|
|
Adjusted gross profit *
|
|
$
|
97,910
|
|
|
$
|
108,860
|
|
|
|
(10.1
|
%)
|
|
$
|
195,844
|
|
|
$
|
210,310
|
|
|
|
(6.9
|
%)
|
Adjusted gross margin *
|
|
|
56.1
|
%
|
|
|
55.2
|
%
|
|
|
|
|
|
|
56.2
|
%
|
|
|
54.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted Operating Income / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Operating income
|
|
$
|
9,204
|
|
|
$
|
16,128
|
|
|
|
(42.9
|
%)
|
|
$
|
27,845
|
|
|
$
|
27,927
|
|
|
|
(0.3
|
%)
|
Adjustments (pre-tax) *
|
|
|
284
|
|
|
|
297
|
|
|
|
|
|
|
|
(6,144
|
)
|
|
|
297
|
|
|
|
|
|
Adjusted operating income *
|
|
$
|
9,488
|
|
|
$
|
16,425
|
|
|
|
(42.2
|
%)
|
|
$
|
21,701
|
|
|
$
|
28,224
|
|
|
|
(23.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net sales
|
|
$
|
174,574
|
|
|
$
|
197,152
|
|
|
|
(11.5
|
%)
|
|
$
|
348,495
|
|
|
$
|
384,937
|
|
|
|
(9.5
|
%)
|
GAAP Operating margin
|
|
|
5.3
|
%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
8.0
|
%
|
|
|
7.3
|
%
|
|
|
|
|
Adjusted operating margin *
|
|
|
5.4
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
6.2
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted Net Income / Adjusted Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP Net income
|
|
$
|
7,086
|
|
|
$
|
12,190
|
|
|
|
(41.9
|
%)
|
|
$
|
21,192
|
|
|
$
|
21,030
|
|
|
|
0.8
|
%
|
Adjustments, net of tax *
|
|
|
214
|
|
|
|
224
|
|
|
|
|
|
|
|
(4,639
|
)
|
|
|
224
|
|
|
|
|
|
Adjusted net income
|
|
$
|
7,300
|
|
|
$
|
12,414
|
|
|
|
(41.2
|
%)
|
|
$
|
16,553
|
|
|
$
|
21,254
|
|
|
|
(22.1
|
%)
|
Diluted weighted average common shares
|
|
|
26,612
|
|
|
|
26,923
|
|
|
|
|
|
|
|
26,681
|
|
|
|
26,932
|
|
|
|
|
|
GAAP Diluted EPS
|
|
$
|
0.27
|
|
|
$
|
0.45
|
|
|
|
(40.0
|
%)
|
|
$
|
0.79
|
|
|
$
|
0.78
|
|
|
|
1.3
|
%
|
Adjusted diluted EPS *
|
|
$
|
0.27
|
|
|
$
|
0.46
|
|
|
|
(41.3
|
%)
|
|
$
|
0.62
|
|
|
$
|
0.79
|
|
|
|
(21.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale Adjusted Operating Income / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale GAAP operating income
|
|
$
|
5,730
|
|
|
$
|
8,821
|
|
|
|
(35.0
|
%)
|
|
$
|
22,658
|
|
|
$
|
23,136
|
|
|
|
(2.1
|
%)
|
Adjustments (pre-tax) *
|
|
|
284
|
|
|
|
74
|
|
|
|
|
|
|
|
(6,292
|
)
|
|
|
74
|
|
|
|
|
|
Adjusted wholesale operating income *
|
|
$
|
6,014
|
|
|
$
|
8,895
|
|
|
|
(32.4
|
%)
|
|
$
|
16,366
|
|
|
$
|
23,210
|
|
|
|
(29.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale net sales
|
|
$
|
91,889
|
|
|
$
|
107,658
|
|
|
|
(14.6
|
%)
|
|
$
|
193,218
|
|
|
$
|
225,730
|
|
|
|
(14.4
|
%)
|
Wholesale GAAP operating margin
|
|
|
6.2
|
%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
11.7
|
%
|
|
|
10.2
|
%
|
|
|
|
|
Adjusted wholesale operating margin *
|
|
|
6.5
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
8.5
|
%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Adjusted Operating Income / Operating Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail GAAP operating income
|
|
$
|
(135
|
)
|
|
$
|
3,311
|
|
|
|
(104.1
|
%)
|
|
$
|
1,429
|
|
|
$
|
1,752
|
|
|
|
(18.4
|
%)
|
Adjustments (pre-tax) *
|
|
|
-
|
|
|
|
223
|
|
|
|
|
|
|
|
148
|
|
|
|
223
|
|
|
|
|
|
Adjusted retail operating income *
|
|
$
|
(135
|
)
|
|
$
|
3,534
|
|
|
|
(103.8
|
%)
|
|
$
|
1,577
|
|
|
$
|
1,975
|
|
|
|
(20.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail net sales
|
|
$
|
139,101
|
|
|
$
|
158,508
|
|
|
|
(12.2
|
%)
|
|
$
|
276,367
|
|
|
$
|
303,722
|
|
|
|
(9.0
|
%)
|
Retail GAAP operating margin
|
|
|
(0.1
|
%)
|
|
|
2.1
|
%
|
|
|
|
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
|
|
Adjusted retail operating margin *
|
|
|
(0.1
|
%)
|
|
|
2.2
|
%
|
|
|
|
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
|
|
* 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:
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(Unaudited)
|
|
Three months ended
|
|
|
Six months ended
|
|
(In thousands)
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Inventory write-downs and manufacturing overhead costs
|
|
$
|
389
|
|
|
$
|
-
|
|
|
$
|
4,529
|
|
|
$
|
-
|
|
Adjustments to gross profit
|
|
$
|
389
|
|
|
$
|
-
|
|
|
$
|
4,529
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges, including inventory write-downs (wholesale)
|
|
$
|
211
|
|
|
$
|
74
|
|
|
$
|
4,982
|
|
|
$
|
74
|
|
Gain on sale of Passaic, New Jersey property (wholesale)
|
|
|
-
|
|
|
|
-
|
|
|
|
(11,497
|
)
|
|
|
-
|
|
Other professional fees incurred (wholesale)
|
|
|
73
|
|
|
|
-
|
|
|
|
223
|
|
|
|
-
|
|
Retail acquisition costs and other restructuring charges (retail)
|
|
|
-
|
|
|
|
223
|
|
|
|
148
|
|
|
|
223
|
|
Adjustments to operating income
|
|
$
|
284
|
|
|
$
|
297
|
|
|
$
|
(6,144
|
)
|
|
$
|
297
|
|
Adjustments to income before income taxes
|
|
$
|
284
|
|
|
$
|
297
|
|
|
$
|
(6,144
|
)
|
|
$
|
297
|
|
Related income tax effects (1)
|
|
|
(70
|
)
|
|
|
(73
|
)
|
|
|
1,505
|
|
|
|
(73
|
)
|
Adjustments to net income
|
|
$
|
214
|
|
|
$
|
224
|
|
|
$
|
(4,639
|
)
|
|
$
|
224
|
|
(1)
|
Calculated using a tax rate of 24.5% in both periods presented.
|
Liquidity
At December 31, 2019, we held cash and cash equivalents of $28.3 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 4.6% of our total assets at December 31, 2019, compared with 7.3% of our total assets a year ago and 4.1% at June 30, 2019. Our cash and cash equivalents increased $7.5 million during the first six months of fiscal 2020 due to net cash provided by operating activities of $23.4 million and proceeds from the sale of our Passaic property of $11.7 million, partially offset by $10.7 million in dividend payments, $8.2 million in share repurchases and $8.0 million of capital expenditures.
A summary of net cash provided by (used in) operating, investing, and financing activities for the six months ended December 31, 2019 and 2018 is provided below (in millions):
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash provided by (used in) operating activities
|
|
|
|
|
|
|
|
|
Net income plus other non-cash items
|
|
$
|
23.7
|
|
|
$
|
31.7
|
|
Non-cash operating lease cost
|
|
|
16.2
|
|
|
|
-
|
|
Restructuring payments
|
|
|
(5.0
|
)
|
|
|
-
|
|
Change in working capital
|
|
|
(11.5
|
)
|
|
|
(0.2
|
)
|
Total provided by operating activities
|
|
$
|
23.4
|
|
|
$
|
31.5
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
|
|
Proceeds from disposal of fixed assets, including sale of Passaic property
|
|
$
|
12.4
|
|
|
$
|
-
|
|
Capital expenditures
|
|
|
(8.0
|
)
|
|
|
(5.0
|
)
|
Acquisitions, net of cash acquired
|
|
|
(1.3
|
)
|
|
|
-
|
|
Other investing activities
|
|
|
0.1
|
|
|
|
0.1
|
|
Total provided by (used in) investing activities
|
|
$
|
3.2
|
|
|
$
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
|
|
|
|
|
|
Payment of cash dividends
|
|
$
|
(10.7
|
)
|
|
$
|
(10.1
|
)
|
Repurchase of common stock
|
|
|
(8.2
|
)
|
|
|
-
|
|
Other financing activities
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
Total (used in) financing activities
|
|
$
|
(19.1
|
)
|
|
$
|
(10.2
|
)
|
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Cash Provided by (Used in) Operating Activities. Year-to-date cash provided by operating activities was $23.4 million, a decrease of $8.1 million from the year ago period primarily due to lower net income combined with $5.0 million in restructuring payments made in connection with our previously announced optimization of manufacturing and logistics activities. Restructuring payments included $2.4 million in severance, $1.3 million of manufacturing overhead costs and $1.3 million of other exit and relocation costs. The change in working capital was primarily due to timing of accounts payable and accrued expenses combined with lower retail customer deposits partially offset by improved inventory management. As a result of the adoption of ASU 2016-02, we now report non-cash operating lease costs as a non-cash adjustment to reconcile net income while our monthly lease payments are reported as a reduction to operating lease liabilities within working capital.
Cash Provided by (Used in) Investing Activities. Year-to-date cash of $3.2 million was provided by investing activities due to cash proceeds of $12.4 million received from the sale of the Passaic property and other manufacturing equipment, partially offset by capital expenditures of $8.0 million and $1.3 million from design center acquisitions. Cash paid to acquire design centers from our independent retailers in an arm’s length transaction totaled $1.3 million during the first six months of fiscal 2020 compared with none a year ago.
Cash Provided by (Used in) Financing Activities. Year-to-date cash of $19.1 million was used in financing activities compared with $10.2 million of cash used in the prior year comparable period. The increase year over year was primarily due to share repurchases and a 10.5% increase in our regular quarterly cash dividend per share. Cash dividends increased to $0.21 per share in the second quarter of fiscal 2020 and totaled $10.7 million in the current year compared with $10.1 million in the prior year. 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 repurchased 545,727 shares under our existing share repurchase program during the first six months of fiscal 2020 at an average price of $18.38 per share.
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 half of fiscal 2020 were $8.0 million, compared with $5.0 million in the prior year period. In fiscal 2020, approximately 71% of our total capital expenditures related to opening new and relocating design centers in desirable locations, updating existing design center presentations and floor plans and opening new home delivery service centers. The remaining 29% was primarily capital expenditures incurred in connection with our optimization project as we convert the Old Fort, North Carolina facility into a distribution center and expand our existing Maiden, North Carolina manufacturing campus. 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 December 31, 2019 and June 30, 2019, there was $5.8 million and $6.1 million, respectively, of standby letters of credit outstanding under the revolving credit facility.
Total availability under the Facility was $126.4 million at December 31, 2019 and $158.9 million at June 30, 2019. At December 31, 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. We repurchased 545,727 shares under the program during the first six months of fiscal 2020 at an average price of $18.38 per share. At December 31, 2019, we had a remaining Board authorization to repurchase 1,972,319 shares of our common stock pursuant to our program. On January 13, 2020, the Board of Directors of the Company authorized an increase in the aggregate share repurchase authorization under our existing multi-year share repurchase program (the “Share Repurchase Program”) to 3,000,000 shares.
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 six months of fiscal 2020.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Dividends
In October 2019 we paid a $0.21 per share regular quarterly dividend. On November 13, 2019, our Board of Directors approved a regular quarterly dividend of $0.21 per share. The cash dividend of $5.6 million was paid on January 23, 2020, to common stockholders of record at the close of business on January 9, 2020. 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.
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 six 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, in order to allow us to grow our business.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
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. 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 is designed to enable 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.
We believe our Member Program will continue to gain momentum, which will be complimented by a strong marketing program, starting with a direct mail magazine being distributed in January 2020 to 2.5 million households. This will be further supported by various other marketing channels including local television in select markets and digital and social marketing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates that could impact our financial position and results of operations.
Interest Rate Risk
At December 31, 2019, we did not have any floating-rate debt obligations outstanding under our revolving credit facility. It is anticipated that the fair market value of any future debt under the credit facility will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of such debt would be significantly impacted by current market events. Previous borrowings under the facility during fiscal 2019 had an interest rate equal to the one-month LIBOR rate of 2.5% plus a spread using a debt leverage pricing grid currently at 1.5%. There was no interest expense from borrowings during the first six months of fiscal 2020 as we had no outstanding debt. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future.
LIBOR Transition
LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest earned on our investments and our interest expense. If LIBOR is no longer available, or otherwise at our option, we will pursue alternative interest rate calculations in our credit agreement, including the use of the Secured Overnight Financing Rate (SOFR). As of December 31, 2019, the Company had no outstanding borrowings under its existing credit facility and no material exposure to LIBOR, thus we do not believe the discontinuation of LIBOR will have a material impact on our financial position and results of operations.
Foreign Currency Exchange Risk
Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A hypothetical 10% weaker United States dollar against all foreign currencies at December 31, 2019 would have had an immaterial impact on our consolidated results of operations and financial condition. We currently do not engage in any foreign currency hedging activity and we have no intention of doing so in the foreseeable future.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer (principal executive officer) and the Executive Vice President Administration and Chief Financial Officer (principal financial officer), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 2019, our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in our periodic reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the second fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES