# Ethan Allen Interiors Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [Ethan Allen Interiors Inc](/companies/etd.md) (CIK 896156)
- Form: 10-Q
- Filed: 2022-04-28
- Accepted by EDGAR: Apr 28, 2022, 16:21 ET
- Period: 2022-03-31
- Accession: 0001437749-22-010090
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/896156/000143774922010090/eth20220331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/896156/000143774922010090/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $197.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-07-01 to 2022-03-31 | $588.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $78.2m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2021-07-01 to 2022-03-31 | $237.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $119.5m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-07-01 to 2022-03-31 | $350.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $88.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2021-07-01 to 2022-03-31 | $259.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $32.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-07-01 to 2022-03-31 | $96.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $7.9m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-07-01 to 2022-03-31 | $24.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $24.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-07-01 to 2022-03-31 | $71.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.97 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-07-01 to 2022-03-31 | $2.81 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.97 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-07-01 to 2022-03-31 | $2.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 25,549,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-07-01 to 2022-03-31 | 25,504,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-07-01 to 2022-03-31 | $40.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-01-01 to 2022-03-31 | $5.3m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2021-07-01 to 2022-03-31 | $9.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2021-07-01 to 2022-03-31 | $40.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-03-31 | $95.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $340.8m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $714.9m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $230.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $331.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | $384.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 82,266 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) is designed to provide a reader of our consolidated financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. The MD&A should be read in conjunction with our 2021 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

The MD&A is presented in the following sections:

- Cautionary Note Regarding Forward-Looking Statements
- Executive Overview
- COVID-19 Update
- Ukraine/Russia Conflict
- Key Operating Metrics
- Results of Operations
- Reconciliation of Non-GAAP Financial Measures
- Liquidity
- Capital Resources, including Material Cash Requirements
- Other Arrangements
- Significant Accounting Policies
- Critical Accounting Estimates
- Recent Accounting Pronouncements

18

### Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, forward-looking statements represent management’s beliefs and assumptions concerning current expectations, projections or trends relating to results of operations, financial results, financial condition, strategic objectives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, investments, future economic performance, business and industry and the effect of the COVID-19 pandemic on the business operations and financial results. Such forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. These forward-looking statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “continue,” “may,” “will,” “short-term,” “target,” “outlook,” “forecast,” “future,” “strategy,” “opportunity,” “would,” “guidance,” “non-recurring,” “one-time,” “unusual,” “should,” “likely,” “COVID-19 impact,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. We derive many of our forward-looking statements from operating budgets and forecasts, which are based upon many detailed assumptions. While the Company believes that its assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors and it is impossible for the Company to anticipate all factors that could affect actual results and matters that are identified as “short term,” “non-recurring,” “unusual,” “one-time,” or other words and terms of similar meaning may in fact recur in one or more future financial reporting periods.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that are expected. Actual results could differ materially from those anticipated in the forward-looking statements due to a number of risks and uncertainties including, but not limited to the following: the global COVID-19 pandemic has, and could continue to have, a materially adverse effect on the Company’s business and its results of operations; a resurgence of COVID-19 and resulting containment measures could negatively impact our ability to fulfill existing order backlog or cause changes in consumer demand; a resurgence of COVID-19 could lead to temporary closures, including our distribution centers; the Company may require additional funding from external sources, which may not be available at the levels required, or may cost more than expected; declines in certain economic conditions, which impact consumer confidence and spending; financial or operational difficulties due to competition in the residential home furnishings industry; a significant shift in consumer preference toward purchasing products online; an overall decline in the health of the economy and consumer spending may reduce consumer purchases of discretionary items; inability to maintain and enhance the Ethan Allen brand; failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner; inability to maintain current design center locations at current costs; failure to select and secure appropriate retail locations; disruptions in the supply chain and supply chain management; fluctuations in the price, availability and quality of raw materials resulting in increased costs and production delays, and which could result in a decline in sales; competition from overseas manufacturers and domestic retailers; the number of manufacturing and distribution sites may increase exposure to business disruptions and could result in higher transportation costs; current and former manufacturing and retail operations and products are subject to increasingly stringent environmental, health and safety requirements; product recalls or product safety concerns; extensive reliance on information technology systems to process transactions, summarize results, and manage the business and that of certain independent retailers; disruptions in both primary and back-up systems; successful cyber-attacks and the ability to maintain adequate cyber-security systems and procedures; loss, corruption and misappropriation of data and information relating to customers; global and local economic uncertainty may materially adversely affect manufacturing operations or sources of merchandise and international operations; changes in United States trade and tax policies; the phasing out of LIBOR and the impact on interest rates used in future borrowings; reliance on certain key personnel, loss of key personnel or inability to hire additional qualified personnel; potential future asset impairment charges resulting from changes to estimates or projections used to assess assets’ fair value, financial results that are lower than current estimates or determinations to close underperforming locations; access to consumer credit could be interrupted as a result of external conditions; failure to protect the Company’s intellectual property; hazards and risks which may not be fully covered by insurance; significant labor competition, wage pressure, and at times, a shortage of qualified talent; labor disruptions resulting from COVID-19 vaccination mandates; and other factors disclosed in Part I, Item 1A. Risk Factors, in our 2021 Annual Report on Form 10-K, and elsewhere here in this Quarterly Report on Form 10-Q.

All forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by these cautionary statements, as well as other cautionary statements. A reader should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q in the context of these risks and uncertainties. Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as otherwise required by law.

### Executive Overview

*Who We Are.* Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. As we celebrate 90 years of innovation, we continue to be known for the quality and craftsmanship of our furniture as well as for the exceptional personal service from design to delivery, and for our commitment to social responsibility and sustainable operations. We provide complimentary interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com. Our employees are dedicated to helping each customer create a place that they will love to come home to everyday. We approach each situation with an entrepreneurial attitude, staying focused on long-term growth, and treating our associates, vendors, and customers with dignity and justice, which we believe is critical to remaining both profitable and relevant amidst the constant changes taking place in the world. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of March 31, 2022, the Company operates 141 retail design centers, with 137 located in the United States and four in Canada. Our 160 independently-operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and one lumberyard in the United States, two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately 75% of our products are manufactured in our North American manufacturing plants and we also partner with various suppliers located in Europe, Asia, and other countries to produce products that support our business. During the first three quarters of fiscal 2022, we reaffirmed our commitment to maintain and grow our North American workshops, where our customization capabilities help create relevant and quality products and have proven to provide us with a strategic and a branding advantage.

*Business Model.* Ethan Allen has a distinct vision of American style that we believe differentiates us from our competitors. Our business model is continued focus on (i) capitalizing on the professional service offered to our customers by our interior design professionals in our retail design centers, (ii) investing in new technologies across key aspects of our vertically integrated business, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to our design centers, (iv) communicating our messages with strong advertising and marketing campaigns, and (v) leveraging the benefits of our vertical integration by maintaining a strong manufacturing capacity in North America.

Our competitive advantages arise from:

- our North American manufacturing workshops providing customization capabilities and high-quality products of the finest craftsmanship;
- our complimentary design service offerings through our interior design professionals;
- the use of technology combined with the personal service of our interior design professionals;
- our offerings of a wide array of custom made-to-order products across our upholstery, case goods, and accent product categories;
- our strong retail network, both of independent licensees and Company-operated locations;
- our maintenance of a logistics network of national distribution centers and retail home delivery centers providing white-glove home delivery service; and
- our continued ability to leverage our vertically integrated structure.

*Fiscal 2022 Third Quarter in Review(1).* As we enter our ninth decade as innovative interior designers, manufacturers and retailers, we remain focused on a single enterprise model while maintaining an entrepreneurial attitude. We believe that our vertically integrated business continues to produce positive results and position us for future growth. During the third quarter of fiscal 2022, we introduced several key initiatives, including: enhancing our commitment to good corporate governance practices by adding a new Board member; new product introductions in many areas including upholstery, home office, lighting, outdoor living, decorative accents and a new flooring program; the expansion of our upholstery manufacturing in North Carolina; and the opening of a new concept retail design center in Westport, Connecticut. We were also proud to announce that, for the third consecutive year, our upholstery operation in Mexico was recently named “environmentally and socially responsible” by the Mexican Center for Corporate Philanthropy and the Alliance for Corporate Social Responsibility. These organizations recognize company policies that promote a positive social impact in Mexico and Latin America. We believe that this designation exemplifies our commitment to policies that ensure environmental responsibility as well as dignity and justice for every employee at our Mexican operations.

Our business fundamentals continue to be strong as we reported another quarter of growth in net sales, gross margin, operating margin and diluted EPS. Our wholesale and retail segments each recorded double-digit net sales growth. While our retail segment written orders were down 3.0% compared to a strong third quarter in fiscal 2021, retail orders were up 18.2% from the third quarter of fiscal 2019 (prior to the start of the COVID-19 pandemic). Wholesale segment written orders were down 0.2% to last year, but up 8.4% compared with the third quarter of fiscal 2019. The higher level of product demand that we continue to experience has also led to an increase in our order backlog that has continued throughout the third quarter of fiscal 2022 despite the fact that our manufacturing production levels have returned to pre-COVID-19 pandemic levels. We continue to work through our existing order backlog, but are unable to reasonably predict the timing and size of reductions to our backlog. The positive net sales growth combined with our ability to operate more efficiently through the use of technology and reduced headcount (when compared to pre-COVID-19 pandemic levels) helped us expand consolidated gross margin, operating margin and diluted earnings per share. Delivery lead-times remained higher than historical averages due to ongoing supply chain delays and high backlog and we expect these higher lead-times to continue in the near-term. However, our unique vertical structure, whereby we produce about 75% of what we sell, mostly on a custom made-to-order basis in our own North American manufacturing plants, allows us to maintain strong service levels and minimize customer returns and excess inventory.

We ended the third quarter with a strong balance sheet, including cash and investments of $104.6 million as of March 31, 2022, while expanding our consolidated gross and operating margins through disciplined cost and expense controls. Consolidated net sales increased 11.7% as a result of strong written orders and increased levels of manufacturing production that led to higher deliveries combined with the prior year being negatively impacted by COVID-19 related production delays. The increased production was partially offset by ongoing supply chain disruptions, which negatively impacted imports and raw material availability. As the third quarter progressed, we saw an increase in receipt of product from a higher volume of shipping container receipts. Consolidated gross margin increased 310 basis points to 60.4% primarily due to a change in the sales mix, higher productivity in our wholesale manufacturing, product pricing actions taken, and a favorable product mix partially offset by higher import and raw material costs. Operating margin increased from 10.7% of sales in the third quarter of the prior year period to 16.5% in the current year third quarter. Adjusted operating margin, which excludes restructuring initiatives, asset impairments and other corporate actions in both periods presented, was 15.8% of sales, up from 11.1% of sales in the prior year period, primarily due to higher net sales, strong gross margins and cost containment measures, including lower marketing costs. Diluted EPS grew 59.0% to $0.97. Adjusted diluted EPS was $0.93, an increase of 60.3%. Reflecting the strength of our balance sheet and strong history of returning capital to shareholders, our Board declared a regular quarterly cash dividend of $0.29 per share in January 2022, which was subsequently paid in February 2022, bringing the total amount of dividends paid to $40.1 million for the nine months ended March 31, 2022.

While we were pleased with our third quarter performance, we also recognize there are several external factors, such as record inflation, rising interest rates, supply chain challenges and global unrest, that has created higher levels of uncertainty. We expect to see softening consumer interest in home furnishings and to address this expected trend, we remain focused on investing in digital design and interactive communication technologies, refining and repositioning our product offerings to reach a larger client base, and leveraging our vertically integrated structure. Although we cannot reasonably estimate any future economic instability on a macroeconomic scale, we believe that our current business model, strategy and balance sheet will permit us to take advantage of opportunities that may present themselves whether it be during times of economic expansion, contraction or dislocation. We believe we are well-positioned to continue our growth in net sales while maintaining strong gross and operating profit margins due to our high backlog, strong retail network, the personal service of our interior design professionals combined with technology, our unique vertical integration structure whereby about 75% of our products are made in our North American manufacturing workshops, and a strong national logistics with our retail home delivery centers delivering product with white glove service to our clients’ home.

(1) Refer to the *Reconciliation of Non-GAAP Financial Measures* section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics.

### COVID-19 Update

The COVID-19 pandemic continues to evolve with resurgences, disruptions, new virus variants and the continued rollout of vaccines. During the third quarter of fiscal year 2022, we experienced continued COVID-19 related supply chain disruptions, manufacturing disruptions and labor constraints, all of which have led to delays in our production workflow. While demand for our products continues to be strong, these and other disruptions have delayed the process of converting written orders to delivered shipments. In particular, we experienced more prevalent disruptions during the first half of our fiscal 2022 third quarter, notably with respect to shipping and logistics delays, higher COVID-19 related employee absenteeism, and manufacturing disruptions, including raw material supply challenges. These disruptions improved sequentially throughout the latter half of the third quarter of fiscal 2022, and while we continue to assess the impacts to our business and combat any adverse effects, we are unable to predict the full scope of any impacts that the COVID-19 pandemic will have on our financial operations in the near- and long-term.

*Supply constraints.* We are experiencing record inflationary pressure on our raw materials coupled with supplier volatility as certain suppliers are also experiencing material and labor shortages. We are working to offset these issues through price increases on our products, supplier negotiations, sourcing initiatives, make-versus-buy analyses, product re-engineering and parts standardization. To further increase our control over raw materials, purchased parts, and labor costs while maintaining our high-quality standards, we completed the purchase of property, plant and equipment from Dimension Wood Products, Inc. during the third quarter of fiscal 2022. This has enabled us to maintain our current production levels, *e.g.*, with 75% of our products being manufactured in our North American facilities and 25% being sourced primarily from Southeast Asia and China. The receipt of inventory and raw material imports from these areas has, at times, been slowed, disrupted and often more expensive than in prior years. The inflationary pricing pressure led to gross margin compression within our wholesale segment during the third quarter of fiscal 2022 as our price increases to our customers did not occur as quickly as the inflationary pressure on our input costs.

*Shipping disruptions.* We continue to be exposed to rising costs in both domestic and oceanic freight. Transportation costs are managed by optimizing logistics and supply chain planning, but the current freight rate levels are elevated such that significant year-over-year increases occurred so far during fiscal 2022 are expected to remain elevated for the remainder of the current fiscal year. Ocean freight capacity issues also continue to persist worldwide due to the COVID-19 pandemic, which has resulted in significant price increases per shipping container. These elevated freight costs negatively impacted our gross and operating margins, especially within our wholesale segment. In addition, extended shipping times due to port congestion and/or container availability, have led to continued high backlog and delays in product delivery to our customers.

*Labor constraints.* We saw improvements with respect to our ability to identify and hire talent during the third quarter of fiscal 2022. However, we are experiencing significant labor competition and wage inflation in certain geographies, particularly at our distribution facilities located in the United States. In addition, outside suppliers that we rely on have also experienced, and continue to experience, labor constraints. These ongoing internal and external labor challenges have led to higher wage rates from actions to attract new and retain existing employees and increased costs from higher overtime and the need to hire temporary help to meet demand. See Item 1A. *Risk Factors* in this Quarterly Report on Form 10-Q, for discussion of risks associated with such labor constraints.

*Vaccine mandates.* Our ability to comply with either a vaccine mandate or proposed weekly testing requirements could be difficult, costly and result in attrition. See Item 1A. *Risk Factors* in this Quarterly Report on Form 10-Q, for discussion of risks associated with the potential adverse effects on our workforce with respect to compliance with vaccine mandates and testing requirements. As of March 31, 2022, the Company is not required to follow a vaccine mandate or subject to weekly testing requirements.

We frequently monitor and re-evaluate our COVID-19 action plan based on guidance from the Centers for Disease Control and Prevention, other parts of the United States government, regulators and other health and safety organizations. We believe that we have a strong balance sheet with $104.6 million of cash and investments with no bank borrowings outstanding as of March 31, 2022, that will provide sufficient liquidity to continue business operations in the long-term. Although we continue to actively manage the impact of COVID-19 and the prospect of continuing or future outbreaks, we are unable to predict the impact that the COVID-19 pandemic will have on our financial operations in the near- and long-term. We also continue to actively manage our global supply chain and manufacturing operations, which may continue to be adversely impacted with respect to availability and pricing based on uncontrollable factors.

### Ukraine/Russia Conflict

We are closely monitoring the current and potential impact of the Russian invasion of Ukraine on our business, our employees, and our customers. We have taken all necessary steps to ensure compliance with all applicable regulatory restrictions on international trade and financial transactions. We have no offices in Russia or Ukraine, but are monitoring the regional and global ramifications of the unfolding events in the area.

In February 2022, the United States and other countries imposed sanctions on Russia. Due to these sanctions imposed on certain regions of Ukraine and on Russia, our supply chain may be impacted by applicable restrictions and the scope of such restrictions is subject to ongoing change. In addition, due to countermeasures imposed by the Russian government, the sourcing of certain products that use Russian wood may be affected. Even though our manufacturing operations do not use any products that are currently on the sanctioned list, we are continually monitoring the evolving sanctions. We are currently evaluating our suppliers to reduce potential exposure and minimize pricing pressure as the unrest continues to put upward pressure on costs and product availability. At this time, we do not anticipate a significant impact to our future results of operations.

### Key Operating Metrics

A summary of our key operating metrics is presented in the following table (in millions, except per share data).

| Three months ended March 31, 2022 | % of Sales | % Chg | 2021 | % of Sales | Nine months ended March 31, 2022 | % of Sales | % of Chg | 2021 | % of Sales |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales $197.7 | 100.0% | 11.7% | $177.0 | 100.0% | $588.1 | 100.0% | 16.0% | $506.8 | 100.0% |
| Gross profit $119.5 | 60.4% | 17.8% | $101.4 | 57.3% | $350.9 | 59.7% | 21.6% | $288.5 | 56.9% |
| Adjusted gross profit(1) $119.5 | 60.4% | 17.8% | $101.4 | 57.3% | $350.9 | 59.7% | 21.5% | $288.9 | 57.0% |
| Operating income $32.7 | 16.5% | 72.0% | $19.0 | 10.7% | $96.3 | 16.4% | 80.9% | $53.2 | 10.5% |
| Adjusted operating income(1) $31.3 | 15.8% | 59.9% | $19.6 | 11.1% | $91.8 | 15.6% | 66.2% | $55.3 | 10.9% |
| Net income $24.7 | 12.5% | 58.3% | $15.6 | 8.8% | $71.8 | 12.2% | 71.5% | $41.8 | 8.3% |
| Adjusted net income(1) $23.7 | 12.0% | 61.5% | $14.7 | 8.3% | $68.4 | 11.6% | 66.3% | $41.1 | 8.1% |
| Diluted EPS $0.97 |  | 59.0% | $0.61 |  | $2.81 |  | 70.3% | $1.65 |  |
| Adjusted diluted EPS(1) $0.93 |  | 60.3% | $0.58 |  | $2.68 |  | 64.4% | $1.63 |  |
| Cash flow from operating activities $17.3 |  | (52.2%) | $36.2 |  | $40.0 |  | (60.8%) | $102.1 |  |
| Adjusted annualized return on equity(1) |  |  |  |  | 24.3% |  |  | 16.1% |  |
| Wholesale written orders |  | (0.2%) |  |  |  |  | 3.3% |  |  |
| Retail written orders |  | (3.0%) |  |  |  |  | 0.8% |  |  |

(1) Refer to the *Reconciliation of Non-GAAP Financial Measures* section within the MD&A for the reconciliation of GAAP to adjusted key financial metrics.

The following table shows our design center information.

| Retail Design Center activity: | Fiscal 2022 Independent retailers | Company- operated | Total | Fiscal 2021 Independent retailers | Company- operated | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Balance at July 1 | 161 | 141 | 302 | 160 | 144 | 304 |
| New locations | 5 | 1 | 6 | 12 | 3 | 15 |
| Closures | (6) | (1) | (7) | (12) | (3) | (15) |
| Transfers | - | - | - | - | - | - |
| Balance at March 31 | 160 | 141 | 301 | 160 | 144 | 304 |
| Relocations (in new and closures) | - | - | - | - | 1 | 1 |
| Retail Design Center geographic locations: |  |  |  |  |  |  |
| United States | 34 | 137 | 171 | 34 | 139 | 173 |
| Canada | - | 4 | 4 | - | 5 | 5 |
| China | 107 | - | 107 | 109 | - | 109 |
| Other Asia | 12 | - | 12 | 11 | - | 11 |
| Middle East and Europe | 7 | - | 7 | 6 | - | 6 |
| Total | 160 | 141 | 301 | 160 | 144 | 304 |

### Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three and nine months ended March 31, 2022 and 2021, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q.

### Fiscal 2022 Third Quarter compared with Fiscal 2021 Third Quarter

*(in thousands)*

|  | Three months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Consolidated net sales | $197,659 | $176,962 | 11.7% |
| Wholesale net sales | $121,034 | $107,820 | 12.3% |
| Retail net sales | $166,727 | $141,396 | 17.9% |
| Consolidated gross profit | $119,460 | $101,409 | 17.8% |
| Consolidated gross margin | 60.4% | 57.3% |  |

23

**Consolidated net sales** were $197.7 million, an increase of 11.7% compared to the prior year period. We continue to experience sustained high demand for our products, which has led to written orders being well above pre-pandemic levels. We increased manufacturing production and inventory levels as well as taken pricing actions to counteract rising material and freight costs. These efforts have led to higher deliveries and when combined with the prior year impact from the COVID-19 pandemic, which negatively impacted our ability to deliver product to customers, helped us grow consolidated net sales by 11.7%. While demand for our products continue to be strong, supply and labor constraints have created challenges and, during the current quarter delayed the process of converting written orders to delivered shipments. As the third quarter of fiscal 2022 progressed, we experienced an increase in our manufacturing productivity as well as an increase in receipt of imports and raw materials from a higher volume of shipping container receipts, which led to strong sales growth during the quarter. Existing order backlog increased during the third quarter, which we attribute to strong product demand combined with supply and labor constraints that were prevalent during the first half of the quarter. We believe it will take several quarters to catch up to the increase in customer demand as there remains ongoing supply chain challenges, such as certain raw material shortages, increased cost of shipping and import delays. As we continue to work through the high backlog, we believe that there is an opportunity for future positive growth in delivered net sales based on the size of our order backlog and written order growth.

**Wholesale net sales** increased 12.3% to $121.0 million primarily due to a 16.4% increase in intersegment sales to our Company-operated design centers combined with a 9.9% increase in sales to our United States independent dealers and a 1.1% increase in contract sales partially offset by lower international sales. Excluding intersegment sales to our retail segment, wholesale net sales increased from higher United States independent dealer sales. The 1.1% increase in our contract business sales was primarily from the United States government General Services Administration (“GSA”). During the first nine months of fiscal 2022, we have seen strong order growth from the GSA and when combined with high backlog and increased production, led to an increase in net sales during the period. We remain optimistic in future growth as written orders from our GSA contract increased 45.4% during the first nine months of fiscal 2022 compared with a year prior. Our international net sales were down 29.6% due to a reduction in net sales to China. Our sales to international independent retailers represented 2.6% of total wholesale net sales compared to 4.1% in the prior year period.

Wholesale written orders, which represent orders booked through all of our channels, were down 0.2% in the third quarter of fiscal 2022 compared with the third quarter of fiscal 2021. After the reopening of all our retail design centers in early fiscal 2021, we experienced a significant surge in demand leading to a strong, but difficult prior year comparison. As a result of the strong prior year third quarter, our independent North American retail network orders were down 3.7% and international orders from China declined 43.4%. China written orders declined primarily from prolonged COVID-19 related lockdowns. Partially offsetting these decreases was a 1.0% increase in orders from our Company-operated design centers. When compared to the third quarter of fiscal 2019 (pre-pandemic levels), written orders from our Company-operated design centers were up 21.9% while our independent North American retail network grew by 3.2%. Due to strong product demand and challenges during the first half of the third quarter, including supply chain disruptions, raw material availability, and COVID-19 absenteeism among our employees and those of our outside suppliers, our wholesale backlog increased by 3.4% in the past three months and by 25.0% compared to the prior fiscal year period, and up 5.8% from June 30, 2021. However, due to strong production and related deliveries during the month of March 2022, we were able to decrease wholesale backlog since February 28, 2022, and remain focused on increasing wholesale production and shipping to the levels that are necessary to service our customers on a timely basis and reduce our backlog.

**Retail net sales** from Company-operated design centers increased 17.9% to $166.7 million. There was a 17.9% increase in net sales in the United States, while net sales from our Canadian design centers decreased 19.8%. Retail net sales were up due to strong written orders, increased premier home delivery revenue, high backlog that led to higher deliveries, recent price increases and strong shipments from improved manufacturing production compared to the prior year which was negatively impacted by production delays as a result of the COVID-19 pandemic. As noted earlier, after the reopening of all our retail design centers in early fiscal 2021, we experienced a significant surge in demand leading to a strong, but difficult prior year comparison. As a result, our retail written orders decreased 3.0% year over year, but are up 18.2% from pre-pandemic levels of fiscal 2019, reflective of the strength of our product offerings and interior design professionals increasingly combining technology with their personal service and continued consumer interest in the home. We have continued to experience strong order trends driven by increased demand for our products and strong execution at the design center level. However, the resurgence of COVID-19 variants during the first half of the third quarter of fiscal 2022 contributed to a 6.7% decrease in quarterly traffic. We remain focused on growing our same-store sales through improved execution at the design center level as well as opening new design centers, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth, or where we believe we have opportunities for further market penetration. As of March 31, 2022, there were 141 Company-operated design centers compared with 144 in the prior year period.

**Gross profit** increased 17.8% to $119.5 million compared with the prior year third quarter due to sales growth within both the wholesale and retail segments, a change in the sales mix, product pricing actions taken, benefits realized from the ongoing manufacturing and logistics optimization project and a favorable product mix partially offset by higher raw material and freight costs. Retail gross profit was up due to a 17.9% increase in net shipments combined with a 320-basis point improvement in gross margin from a favorable change in product mix, higher premier home delivery revenue, an increase in average ticket sale and higher clearance sale margins. Wholesale gross profit increased in the current year third quarter due to a 12.3% increase in wholesale net shipments, efficiencies gained from higher manufacturing production levels, product pricing actions taken, and benefits being realized from the previously executed optimization of manufacturing and logistics initiatives. Each product category within wholesale (upholstery, case goods and home accents) increased its net sales, which helped to partially offset rising raw material and freight costs. Our inability to keep pace with inflationary pressures that we are experiencing negatively impacted our wholesale gross profit during the third quarter. In particular, the price of raw materials involved with upholstery manufacturing, including plywood, foam, frames and fabric, continued to escalate in price over the past twelve months. To help minimize impacts from increasing costs, we believe we have taken necessary pricing actions to align our invoice price more closely with our production costs.

**Gross margin** was 60.4%, up from 57.3% a year prior due to a change in the sales mix, higher manufacturing productivity, product pricing actions taken and a favorable product mix. Retail sales, as a percentage of total consolidated sales, were 84.4% in the current year third quarter, up from 79.9% in the prior year period. We expect this higher percentage of retail sales to consolidated sales to moderate towards normalized levels as we increase delivery of the high wholesale order backlog, including a high contract business backlog. While we were pleased with a strong consolidated gross margin of 60.4%, we expect our margins to return to a range of approximately 57.5% to 58.5% in the near term from the impact of escalating raw material, labor and freight costs combined with a return of our sales mix to more historical norms. Benefits realized from increased productivity from the ongoing manufacturing and logistics optimization helped to minimize margin pressure from rising freight and raw material costs.

*(in thousands)*

|  | Three months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| SG&A expenses | $88,270 | $81,829 | 7.9% |
| Restructuring and other impairment charges, net of gains | $(1,463) | $593 | (346.8%) |
| Consolidated operating income | $32,653 | $18,987 | 72.0% |
| Consolidated operating margin | 16.5% | 10.7% |  |
| Wholesale operating income | $16,536 | $14,508 | 14.0% |
| Retail operating income | $19,330 | $4,962 | 289.6% |

**SG&A expenses** increased to $88.3 million, or 44.7% of net sales, compared with $81.8 million, or 46.2% of net sales in the prior year period. SG&A expenses, when expressed as a percentage of sales, decreased 150 basis points in the third quarter of fiscal 2022, compared with the same period in the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 7.9% while consolidated net sales grew at a much faster rate of 11.7%, which led to improved operating leverage at both the retail and wholesale segment. Our ability to deliver backlog and increase net sales in the future will further improve our operating margins as we leverage our vertically integrated structure. The 7.9% increase in SG&A expenses was primarily driven by higher selling costs of 9.3% and a 5.7% increase in general and administrative expenses. Retail selling expenses were up 10.4% due to the 17.9% increase in net sales, which drove higher delivery costs as well as increased variable compensation. Wholesale selling costs, which includes logistics, grew by 6.6% as fuel and freight costs increased from higher sales volumes and rising commodity prices. These selling costs were partially offset by a reduction in marketing spend. For the third quarter of fiscal 2022, we reduced our advertising in various mediums including less national television and regional radio markets, thereby reducing our overall advertising spend to 2.3% of net sales compared to 3.5% in the prior year third quarter. However, through our recent digital campaigns, we have substantially increased our digital marketing outreach, which helped us reach more households through the publication of our digital magazine. For the remainder of the fiscal 2022 year, we expect our advertising to range between 2-3% of net sales. General and administrative expenses increased 5.7% during the just completed third quarter primarily due to higher compensation from additional headcount, increased occupancy charges from new locations and maintenance costs, and higher retail merchandising and display costs in our design centers with new product introductions.

**Restructuring and other impairment charges, net of gains** was a reported $1.5 million gain compared to a loss of $0.6 million in the prior year period. During the third quarter of fiscal 2022, we sold a previously closed retail location to an independent third party for $2.6 million, which resulted in a pre-tax gain of $1.5 million. In the year ago third quarter, we sold a previously closed retail property resulting in a pre-tax gain of $0.7 million.

**Operating income** was $32.7 million compared with $19.0 million in the prior year period. Adjusted operating income, which excludes restructuring and other charges, was $31.3 million, or 15.8% of net sales compared with $19.6 million, or 11.1% of net sales in the prior year period. The significant increase in operating income was driven by the $20.7 million increase in consolidated net sales, retail gross margin expansion, reduced marketing spend and strong cost containment measures partially offset by wholesale gross margin contraction, higher selling expenses and increased delivery and freight costs. Our ability to maintain disciplined cost and expense controls, including strong cost containment measures, reduced marketing spend and tight expense management within our general and administrative expenses, continues to help drive operating income growth. Compared to the end of the third quarter of the prior year period, our headcount is up 165 associates or 4.0%. However, compared to two years ago, our global headcount is down 4.5%, which has contributed to consolidated operating income expansion.

**Wholesale operating income** was $16.5 million or 13.7% of net sales, an increase compared with $14.5 million or 13.5% of net sales in the prior year period due to wholesale net sales growth of 12.3%, reduced marketing spend, strong cost containment measures and manufacturing production levels that have returned back to pre-COVID-19 pandemic levels. These benefits were partially offset by wholesale gross margin contraction from higher raw material costs, increased distribution costs from incremental volume and price and increased headcount within merchandising. Wholesale SG&A expenses, when expressed as a percentage of sales, decreased 140 basis points in the third quarter of fiscal 2022, compared with the same period in the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 4.8% while net sales grew at a much faster rate of 12.3%, which led to improved operating leverage.

**Retail operating income** was $19.3 million, or 11.6% of sales, compared with $5.0 million, or 3.5% of sales in the prior year period. The retail operating margin improved to 11.6% primarily due to the 17.9% increase in net sales, a 320-basis point expansion in retail gross margin, a pre-tax gain of $1.5 million from the sale of a previously closed retail location and the ability to manage operating expenses, which grew at a lower rate than net sales. While selling, delivery and variable compensation expenses were up due to the growth in sales volume, total retail operating expenses including restructuring and impairment charges, when expressed as a percentage of net sales, decreased 480 basis points. This decrease was due to the ability to leverage fixed costs, adhere to strong cost control measures implemented at the onset of the COVID-19 pandemic, reduce marketing spend while still driving strong written orders and maximize existing administrative headcount.

*(in thousands, except per share data)*

|  | Three months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Income tax expense | $7,878 | $3,385 | 132.7% |
| Effective tax rate | 24.2% | 17.8% |  |
| Net income | $24,714 | $15,608 | 58.3% |
| Diluted EPS | $0.97 | $0.61 | 59.0% |

**Income tax expense** was $7.9 million compared with $3.4 million in the prior year third quarter primarily due to the $13.6 million increase in income before income taxes. Our consolidated effective tax rate was 24.2% compared with 17.8% in the prior year comparable period. Our effective tax rate of 24.2% varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year was primarily due to a reduction in our valuation allowance on retail state and local deferred tax assets in the prior year period.

**Net income** was $24.7 million compared with $15.6 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, was $23.7 million, up 61.5% from the prior year period due to stronger net sales, improved retail and consolidated gross margins, cost containment measures resulting in minimizing operating expense growth and improving production and delivery of products to customers partially offset by higher raw material and freight costs.

**Diluted EPS** was $0.97 compared with $0.61 per diluted share in the prior year comparable period. Adjusted diluted EPS was $0.93, up 60.3% compared with the prior year period primarily due to net sales growth of 11.7%, expanded retail and consolidated gross margins, our ability to minimize operating expense growth including lower marketing spend, higher production and delivery of products to customers and improved operating leverage from our vertically integrated enterprise partially offset by higher raw material and freight costs, which negatively impacted our wholesale gross margin.

### Nine Months ended March 31, 2022 compared with Nine Months ended March 31, 2021

*(in thousands)*

|  | Nine months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Consolidated net sales | $588,079 | $506,846 | 16.0% |
| Wholesale net sales | $346,403 | $306,704 | 12.9% |
| Retail net sales | $501,296 | $404,295 | 24.0% |
| Consolidated gross profit | $350,921 | $288,511 | 21.6% |
| Consolidated gross margin | 59.7% | 56.9% |  |

**Consolidated net sales** were $588.1 million, an increase of 16.0% compared to the prior year period. Despite continued supply chain headwinds, the ongoing impact of sustained demand, improved manufacturing production, and pricing actions led to significant sales growth in the first nine months of fiscal 2022 compared with the same period a year ago.

**Wholesale net sales** increased 12.9% to $346.4 million primarily due to an 18.7% increase in intersegment sales to our Company-operated design centers combined with a 12.0% increase in sales to our U.S. independent dealers partially offset by lower contract and international sales. Excluding intersegment sales to our retail segment, wholesale net sales decreased 1.4% from lower contract and international sales. While our contract business sales were down 11.9%, sales in the just completed third quarter were up 1.1% from a year ago, a reversal of the trend experienced during the first two quarters in fiscal 2022. Written orders from our contract business were up 65.3% during fiscal 2022, thus we believe that contract sales will be strong during the remainder of 2022. Our international net sales were down 30.4% due to a reduction in net sales to China. Our international sales to independent retailers represented 2.9% of total wholesale net sales compared to 4.7% in the prior year period.

Wholesale written orders, which represent orders booked through all of our channels, were up 3.3% in the first nine months of fiscal 2022 compared with the prior year. Wholesale orders from our Company-operated design centers increased 1.6% while our contract business performed well, increasing 65.3%. Partially offsetting the growth was a 6.5% decrease in orders from our independent North American retail network and a 55.9% decrease in international orders from China. The decrease in orders from China is primarily related to ongoing COVID-19 lockdowns.

**Retail net sales** from Company-operated design centers increased 24.0% to $501.3 million. There was a 24.6% increase in net sales in the United States, while net sales from our Canadian design centers increased 6.7%. Retail written orders grew 0.8% year-over-year, which was up against a strong prior year period, which we believe reflect the strength of our product offerings and interior design professionals who are increasingly combining technology with their personal service and continued consumer interest in the home. We have continued to experience strong order trends driven by increased demand for products and strong execution at the design center level.

**Gross profit** increased 21.6% to $350.9 million compared with the prior year due to strong sales growth within both our wholesale and retail segments, a change in the sales mix, recent product pricing actions taken, higher manufacturing production and a favorable product mix partially offset by higher raw material and freight costs. Retail gross profit was up due to a 24.0% increase in net shipments combined with a 250-basis point improvement in gross margin from a favorable change in product mix, higher premier home delivery revenue, an increase in average ticket sale, product pricing actions taken and less clearance sales partially offset by promotional fees from financing promotions. Wholesale gross profit was flat to last year as improved manufacturing production and related net sales were offset by higher input costs.

**Gross margin** was 59.7%, up from 56.9% a year prior due to a change in the sales mix, a favorable product mix, recent product pricing actions taken and higher manufacturing production partially offset by higher wholesale production and freight costs. Retail sales, as a percentage of total consolidated sales, were 85.2% in the current year, up from 79.8% in the prior year period, which positively affected consolidated gross margin.

*(in thousands)*

|  | Nine months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| SG&A expenses | $259,457 | $233,649 | 11.0% |
| Restructuring and other impairment charges, net of gains | $(4,841) | $1,639 | (395.4%) |
| Consolidated operating income | $96,305 | $53,223 | 80.9% |
| Consolidated operating margin | 16.4% | 10.5% |  |
| Wholesale operating income | $39,099 | $40,366 | (3.1%) |
| Retail operating income | $56,310 | $16,854 | 234.1% |

27

**SG&A expenses** increased to $259.5 million, or 44.1% of net sales, compared with $233.6 million, or 46.1% of net sales in the prior year period. The 11.0% increase was driven by higher selling costs while general and administrative expenses remained comparable to the prior year period. Retail selling expenses were up 18.8% due to the 24.0% increase in net sales while wholesale selling costs grew by 8.5% as fuel and freight costs increased from higher sales volumes and rising trucking and shipping costs. These incremental SG&A costs were partially offset by a reduction in marketing spend. General and administrative expenses were well managed during the first nine months of the year, increasing 4.3%, primarily due to additional headcount coupled with higher occupancy and regional management costs. SG&A expenses, when expressed as a percentage of sales, decreased 200 basis points in the first nine months of fiscal 2022, compared with the same period in the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 11.0% while consolidated net sales grew at a rate of 16.0%, which led to improved operating leverage.

**Restructuring and other impairment charges, net of gains** were a gain of $4.8 million compared to a charge of $1.6 million in the prior year period. The current year gain of $4.8 million primarily related to the sale of three properties for a pre-tax gain of $5.4 million partially offset by severance and other lease exit costs. The prior year charge of $1.6 million related primarily to lease exit costs and the impairment of long-lived assets held at a retail design center location partially offset by gains recognized on the sale of two previously owned retail design centers.

**Operating income** was $96.3 million compared with $53.2 million in the prior year period. Adjusted operating income, which excludes restructuring and other charges, was $91.8 million, or 15.6% of net sales compared with $55.3 million, or 10.9% of net sales in the prior year period. The significant increase in operating income of $36.6 million was driven by the $81.2 million increase in consolidated net sales, consolidated and retail gross margin expansion and reduced marketing spend partially offset by lower wholesale gross margin and higher selling expenses.

**Wholesale operating income** was $39.1 million or 11.3% of net sales, a decrease compared with $40.4 million or 13.2% of net sales in the prior year period due to gross margin contraction from higher raw material, freight and production costs combined with higher compensation from additional headcount primarily in manufacturing and merchandising. These headwinds were partially offset by higher sales volumes and manufacturing production levels as well as strong cost containment measures, including lower marketing spend and improved expense management that helped reduce wholesale general and administrative expenses, when expressed as a percentage of net sales.

**Retail operating income** was $56.3 million, or 11.2% of sales, compared with $16.9 million, or 4.2% of sales in the prior year period. The retail operating margin improved to 11.2% primarily due to the 24.0% increase in net sales and a 250-basis point expansion in retail gross margin combined with holding SG&A expenses to a growth rate of 12.9%. While selling, delivery and variable compensation expenses were up due to the growth in sales volume, SG&A expenses including restructuring and impairment charges, when expressed as a percentage of net sales, decreased 380 basis points. The decreases within retail expenses were due to the ability to leverage fixed costs, reduce marketing spend, maintain lower administrative headcount and adhere to strong cost control measures implemented at the onset of the COVID-19 pandemic.

*(in thousands, except per share data)*

|  | Nine months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Income tax expense | $24,389 | $10,568 | 130.8% |
| Effective tax rate | 25.4% | 20.2% |  |
| Net income | $71,761 | $41,844 | 71.5% |
| Diluted EPS | $2.81 | $1.65 | 70.3% |

**Income tax expense** was $24.4 million compared with $10.6 million in the prior year primarily due to the $43.7 million increase in income before income taxes and the prior year reversal of a valuation allowance. Our consolidated effective tax rate was 25.4% compared with 20.2% in the prior year comparable period. Our fiscal 2022 effective tax rate of 25.4% varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year period was primarily due to the prior year reduction in our valuation allowance on state and local retail deferred tax assets.

**Net income** was $71.8 million compared with $41.8 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, was $68.4 million, up 66.3% from the prior year period due to stronger net sales, improved retail and consolidated gross margins and strong cost containment measures resulting in minimizing operating expense growth.

**Diluted EPS** was $2.81 compared with $1.65 per diluted share in the prior year comparable period. Adjusted diluted EPS was $2.68, up 64.4% compared with the prior year period primarily due to net sales growth of 16.0%, expanded retail and consolidated gross margins and our ability to minimize operating expense growth partially offset by higher raw material and freight costs, which negatively impacted our wholesale gross margin.

### Reconciliation of Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including adjusted gross profit and margin, adjusted operating income and margin, adjusted wholesale operating income and margin, adjusted retail operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in tables below.

These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Despite the limitations of these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

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)*

| Consolidated Adjusted Gross Profit / Gross Margin | Three months ended March 31, 2022 | 2021 | % Change | Nine months ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Gross profit | $119,460 | $101,409 | 17.8% | $350,921 | $288,511 | 21.6% |
| Adjustments (pre-tax) \* | - | - |  | - | 389 |  |
| Adjusted gross profit \* | $119,460 | $101,409 | 17.8% | $350,921 | $288,900 | 21.5% |
| Adjusted gross margin \* | 60.4% | 57.3% |  | 59.7% | 57.0% |  |
| Consolidated Adjusted Operating Income / Operating Margin |  |  |  |  |  |  |
| GAAP Operating income | $32,653 | $18,987 | 72.0% | $96,305 | $53,223 | 80.9% |
| Adjustments (pre-tax) \* | (1,351) | 593 |  | (4,503) | 2,028 |  |
| Adjusted operating income \* | $31,302 | $19,580 | 59.9% | $91,802 | $55,251 | 66.2% |
| Consolidated Net sales | $197,659 | $176,962 | 11.7% | $588,079 | $506,846 | 16.0% |
| GAAP Operating margin | 16.5% | 10.7% |  | 16.4% | 10.5% |  |
| Adjusted operating margin \* | 15.8% | 11.1% |  | 15.6% | 10.9% |  |
| Consolidated Adjusted Net Income / Adjusted Diluted EPS |  |  |  |  |  |  |
| GAAP Net income | $24,714 | $15,608 | 58.3% | $71,761 | $41,844 | 71.5% |
| Adjustments, net of tax \* | (1,012) | (933) |  | (3,373) | (718) |  |
| Adjusted net income | $23,702 | $14,675 | 61.5% | $68,388 | $41,126 | 66.3% |
| Diluted weighted average common shares | 25,549 | 25,400 |  | 25,504 | 25,305 |  |
| GAAP Diluted EPS | $0.97 | $0.61 | 59.0% | $2.81 | $1.65 | 70.3% |
| Adjusted diluted EPS \* | $0.93 | $0.58 | 60.3% | $2.68 | $1.63 | 64.4% |
| Wholesale Adjusted Operating Income / Adjusted Operating Margin |  |  |  |  |  |  |
| Wholesale GAAP operating income | $16,536 | $14,508 | 14.0% | $39,099 | $40,366 | (3.1%) |
| Adjustments (pre-tax) \* | 107 | (389) |  | (3,449) | - |  |
| Adjusted wholesale operating income \* | $16,643 | $14,119 | 17.9% | $35,650 | $40,366 | (11.7%) |
| Wholesale net sales | $121,034 | $107,820 | 12.3% | $346,403 | $306,704 | 12.9% |
| Wholesale GAAP operating margin | 13.7% | 13.5% |  | 11.3% | 13.2% |  |
| Adjusted wholesale operating margin \* | 13.8% | 13.1% |  | 10.3% | 13.2% |  |
| Retail Adjusted Operating Income / Adjusted Operating Margin |  |  |  |  |  |  |
| Retail GAAP operating income | $19,330 | $4,962 | 289.6% | $56,310 | $16,854 | 234.1% |
| Adjustments (pre-tax) \* | (1,458) | 982 |  | (1,054) | 2,028 |  |
| Adjusted retail operating income \* | $17,872 | $5,944 | 200.7% | $55,256 | $18,882 | 192.6% |
| Retail net sales | $166,727 | $141,396 | 17.9% | $501,296 | $404,295 | 24.0% |
| Retail GAAP operating margin | 11.6% | 3.5% |  | 11.2% | 4.2% |  |
| Adjusted retail operating margin \* | 10.7% | 4.2% |  | 11.0% | 4.7% |  |

29

\* Adjustments to reported GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following:

*(in thousands)*

|  | Three months ended March 31, 2022 | 2021 | Nine months ended March 31, 2022 | 2021 |
| --- | ---: | ---: | ---: | ---: |
| Inventory reserves and write-downs (wholesale) | $- | $- | $- | $389 |
| Adjustments to gross profit | $- | $- | $- | $389 |
| Inventory reserves and write-downs (wholesale) | $- | $- | $- | $389 |
| Gain on sales of property, plant and equipment (wholesale) | - | (697) | (3,913) | (697) |
| Gain on sales of property, plant and equipment (retail) | (1,518) | (746) | (1,518) | (473) |
| Severance and other charges (wholesale) | 107 | 308 | 464 | 308 |
| Severance and other charges (retail) | (52) | 322 | 126 | 472 |
| Impairment of long-lived assets and lease exit costs (retail) | 112 | 1,406 | 338 | 2,029 |
| Adjustments to operating income | $(1,351) | $593 | $(4,503) | $2,028 |
| Adjustments to income before income taxes | $(1,351) | $593 | $(4,503) | $2,028 |
| Related income tax effects on non-recurring items(1) | 339 | (145) | 1,130 | (497) |
| Income tax benefit from valuation allowance change | - | (1,381) | - | (2,249) |
| Adjustments to net income | $(1,012) | $(933) | $(3,373) | $(718) |

(1) Calculated using a tax rate of 25.1% in the current year and 24.5% in the prior year.

### Liquidity

We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, to allow us to take advantage of opportunities in the markets and to execute our long-term strategic initiatives. Our sources of liquidity include cash and cash equivalents, short-term investments, cash from operations and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations and capital expenditures. We continue to monitor our liquidity closely during this continued period of uncertainty and volatility globally, as well as within our industry, related to the COVID-19 pandemic.

We believe our liquidity (cash and cash equivalents on hand of $95.0 million, short-term investments of $9.5 million, cash flow from operating activities of $40.0 million and amounts available under our credit facility of $121.0 million), will be sufficient to fund our operations, including changes in working capital, anticipated capital expenditures, contractual obligations and other financing activities, as they occur, for at least the next 12 months.

As of March 31, 2022, we had working capital of $110.4 million compared to $71.4 million at June 30, 2021 and a current ratio of 1.48 at March 31, 2022, comparable to 1.32 at June 30, 2021 and 1.29 at March 31, 2021. Included in our cash and cash equivalents at March 31, 2022, is $6.9 million held by foreign subsidiaries, a portion of which we have determined to be indefinitely reinvested.

#### Summary of Cash Flows

At March 31, 2022, we held cash and cash equivalents of $95.0 million compared with $104.6 million at June 30, 2021. Cash and cash equivalents aggregated to 13.3% of our total assets at March 31, 2022, compared with 15.8% of our total assets a year prior and 15.3% at June 30, 2021. In addition, we had short-term investments of $9.5 million to further enhance our returns on cash at March 31, 2022, compared with none at June 30, 2021.

Our cash and cash equivalents decreased $9.6 million or 9.1% during the first nine months of fiscal 2022 due to $40.1 million in cash dividends paid, capital expenditures of $9.0 million and $9.5 million in net purchases of investments partially offset by net cash provided by operating activities of $40.0 million and $10.6 million in proceeds received from sales of property, plant and equipment.

The following table illustrates the main components of our cash flows for the nine months ended March 31, 2022 and 2021 (in millions):

| Operating activities | Nine months ended March 31, 2022 | 2021 |
| --- | ---: | ---: |
| Net income | $71.8 | $41.8 |
| Non-cash operating lease cost | 22.5 | 22.6 |
| Other non-cash items, including depreciation and amortization | 9.7 | 14.7 |
| Restructuring payments | (1.1) | (1.2) |
| Change in working capital | (62.9) | 24.2 |
| Total provided by operating activities | $40.0 | $102.1 |
| Investing activities |  |  |
| Capital expenditures | $(9.0) | $(10.3) |
| Proceeds from sales of property, plant and equipment | 10.6 | 4.9 |
| Purchases of short-term investments, net of sales | (9.5) | - |
| Total used in investing activities | $(7.9) | $(5.4) |
| Financing activities |  |  |
| Payments on borrowings | $- | $(50.0) |
| Dividend payments | (40.1) | (11.6) |
| Taxes paid related to net share settlement of equity awards | (0.8) | (0.1) |
| Proceeds from employee stock plans | 1.1 | 1.7 |
| Payments for debt issuance costs | (0.5) | - |
| Payments on financing leases | (0.5) | (0.4) |
| Total used in financing activities | $(40.8) | $(60.4) |

***Cash Provided by (Used in) Operating Activities.*** We generated $40.0 million in cash from operating activities during the first nine months of fiscal 2022, a decrease from $102.1 million in the prior year period primarily due to an increase in working capital partially offset by higher net income generated during the period. Working capital items consist of current assets (accounts receivable, inventories, prepaid expenses and other current assets) less current liabilities (customer deposits, accounts payable and accrued expenses, operating lease liabilities, accrued compensation and other current liabilities). The increase in working capital was led by higher inventory to increase material availability to support expanded manufacturing and distribution capacity to meet written order growth. The prior year change in working capital was primarily due to lower net shipments combined with strong written order growth that drove the customer deposit balance significantly up. The combination of growing our inventory balance to support high demand and the change in customer deposits from increased net shipments primarily led to the significant year-over-year change in working capital. Restructuring payments made during the first nine months of fiscal 2022 of $1.1 million were primarily for the Atoka, Oklahoma distribution center closing costs, employee severance and lease exit costs (ongoing monthly rent).

***Cash Provided by (Used in) Investing Activities.*** Cash used in investing activities was $7.9 million, an increase of $2.5 million from cash used of $5.4 million in the prior year period due to $9.5 million of net purchases of investments (net of proceeds from sales of investments) partially offset by proceeds received from the sale of three properties and a reduction in capital expenditures. During the third quarter of fiscal 2022, we invested a net $9.5 million in municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. These short-term investments are reported within *Investments* in our consolidated balance sheet as of March 31, 2022. Capital expenditures of $9.0 million during the first nine months of fiscal 2022 related to further expansion of our manufacturing in North Carolina, construction of new retail design centers, spending on design center projection improvements, manufacturing plant upgrades to further increase capacity and efficiency and investments in technology upgrades. In March 2022, we sold a previously closed property to an independent third party for $2.6 million. During the second quarter of fiscal 2022 we completed the sale of our Atoka, Oklahoma distribution center for $2.8 million less closing costs. Lastly, in December 2021, we completed the sale of a property for $5.6 million in cash. In the prior year period, we completed the sale of two previously closed properties for total proceeds of $4.9 million.

***Cash Provided by (Used in) Financing Activities.*** Cash used in financing activities was $40.8 million during the first nine months of fiscal 2022 compared with cash used of $60.4 million in the prior year period. The significant change was due to the repayment of $50.0 million in outstanding borrowings last year partially offset by the payment of a special cash dividend in the current fiscal year and a 16% increase in the regular quarterly cash dividend. Total cash dividends paid during the first nine months of fiscal 2022 were $40.1 million, including a $0.75 per share special dividend paid in August 2021 totaling $19.0 million. The year ago first quarter did not have any cash dividends paid as the Board had previously suspended the cash dividend due to the COVID-19 impact. However, on August 4, 2020, our Board reinstated the regular quarterly cash dividend and declared a cash dividend, which was paid on October 22, 2020. The regular quarterly dividend was increased by 16% to $0.29 per share on November 30, 2021, and paid on January 5, 2022. A regular quarterly dividend for $0.29 per share was also declared on January 25, 2022 and paid on February 23, 2022.

On January 26, 2022, we entered into the Credit Agreement, which amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, between the Loan Parties, JPMorgan Chase Bank, N.A., as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement provides for the $125.0 million Facility, subject to borrowing base availability, and has a maturity date of January 26, 2027. The Credit Agreement also provides us the option to increase the size of the facility up to an additional amount of $60 million. We incurred financing costs of $0.5 million during the third quarter of fiscal 2022, which are being amortized as interest expense over the remaining life of the Facility using the effective interest method. See Note 11, *Credit Agreement*, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a further description of the Credit Agreement.

***Restricted Cash.*** We present restricted cash as a component of total cash and cash equivalents as presented on our consolidated statement of cash flows and within *Other Assets* on our consolidated balance sheet. As of March 31, 2022, we held $0.9 million of restricted cash related to an Ethan Allen insurance captive. We did not hold any restricted cash as of June 30, 2021.

***Exchange Rate Changes.*** Due to changes in exchange rates, our cash and cash equivalents were impacted by less than $0.1 million during the first nine months of fiscal 2022. These changes had an immaterial impact on our cash balances held in Canada, Mexico, and Honduras.

### Capital Resources, including Material Cash Requirements

#### Sources of Liquidity

***Capital Needs.*** We maintain the Credit Agreement that provides the Facility of $125 million and is secured primarily by our accounts receivable and inventory. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. The Credit Agreement has a maturity date of January 26, 2027 and provides us the option to increase the size of the facility up to an additional amount of $60 million. The Facility includes covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As of March 31, 2022, we were not subject to the fixed-charge coverage ratio requirement, had no borrowings outstanding under the Facility, were in compliance with all other covenants and had borrowing availability of $121.0 million of the $125.0 million credit commitment.

***Letters of Credit -*** At March 31, 2022 and June 30, 2021, there was $4.0 million and $5.0 million, respectively, of standby letters of credit outstanding under the Facility.

#### Uses of Liquidity

***Capital Expenditures.*** Capital expenditures during the first nine months of fiscal 2022 totaled $9.0 million compared with $10.3 million in the prior year period. The decrease of $1.3 million from the prior year period related primarily to $2.6 million lower spending on retail design center openings, relocations and projection improvements, as well as the prior year expansion of our existing Maiden, North Carolina manufacturing campus and higher corporate infrastructure and land improvements in the prior year period. The expansion of our existing Maiden, North Carolina upholstery manufacturing campus, which will help plant efficiency, was completed during the third quarter of fiscal 2022. Partially offsetting these decreases was upholstery manufacturing expansion in North Carolina, Case Goods plant upgrades and improvements, including investments in technology, and the purchase of additional manufacturing equipment to further increase capacity. In the first nine months of fiscal 2022, 57% of our total capital expenditures were for manufacturing capital projects while 34% related to retail design center development, expansion and renovation as well as installing additional technology within each design center, including new designer workstations, tablets and enhanced security firewalls. The remaining 9% was primarily for Corporate operations and IT system development to further enhance existing workflows.

We have no material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures. We expect our full year fiscal 2022 capital expenditures to range between $12 million and $14 million as we continue to invest in technology, increase manufacturing capacity and efficiency and open new or relocate design centers while also continuing to improve all our design center projections.

***Dividends.*** Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a strong history of returning capital to shareholders and continued this practice during the first nine months of fiscal 2022 by paying a special dividend of $0.75 per share and increasing the regular quarterly dividend by 16%, which together highlight the strength of our balance sheet and operating results. During the first nine months of fiscal 2022, we paid total cash dividends of $40.1 million, up from $11.6 million a year ago. The fiscal 2022 payments included a special dividend of $19.0 million, which was paid on August 31, 2021. During the third quarter of fiscal 2022, our Board declared a regular quarterly cash dividend of $0.29 per share on January 25, 2022, which was subsequently paid on February 23, 2022 to shareholders of record as of February 7, 2022.

No cash dividends were paid in the prior year first quarter as the Board had previously suspended the cash dividend due to the COVID-19 impact. However, on August 4, 2020, our Board reinstated the regular quarterly cash dividend and declared a cash dividend, which was paid on October 22, 2020 and totaled $5.3 million.

While we expect the Board to continue declaring regular quarterly cash dividends for the foreseeable future, it may discontinue doing so at any time. We will continue to monitor the pace of business as it relates to future dividends and any future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, subject to final determination by our Board.

***Share Repurchase Program.*** At March 31, 2022, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our existing multi-year share repurchase program (the “Share Repurchase Program”). There were no share repurchases under our Share Repurchase Program during the first nine months of fiscal 2022 or fiscal 2021. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions while also maintaining financial flexibility.

***Acquisitions.*** From time to time, we acquire design centers from our independent retailers in arm’s length transactions. There were no independent retailer acquisitions in either period presented.

***Material Cash Requirements from Contractual Obligations.*** Fluctuations in our operating results, levels of inventory on hand, operating lease commitments, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, the rate of written orders and net sales, levels of customer deposits on hand, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As disclosed in our 2021 Annual Report on Form 10-K, as of June 30, 2021, we had total contractual obligations of $203.9 million, including $143.6 million related to our operating lease commitments and $50.2 million open purchase orders. Except for operating lease payments totaling $25.0 million made to our landlords, there were no other material changes, outside of the ordinary course of business, in our contractual obligations as previously disclosed in 2021 Annual Report on Form 10-K. During the first nine months of fiscal 2022, $13.5 million of operating lease assets were obtained in exchange for operating lease liabilities. There were no non-cash financing lease obligations obtained in exchange for new financing leases during fiscal 2022.

### Other Arrangements

We do not utilize or employ any other arrangements in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations. We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.

### Significant Accounting Policies

We describe our significant accounting policies in Note 3, *Summary of Significant Accounting Policies*, in the notes to our consolidated financial statements included in our 2021 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first nine months of fiscal 2022 from those disclosed in our 2021 Annual Report on Form 10-K.

### Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with GAAP. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments and will record adjustments when differences are known.

We discuss our critical accounting estimates in *Management’s Discussion and Analysis of Financial Condition* and *Results of Operations* in our 2021 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first nine months of fiscal 2022 from those disclosed in our 2021 Annual Report on Form 10-K.

### Recent Accounting Pronouncements

See Note 3, *Recent Accounting Pronouncements*, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.

## Market risk

As filed, 5,562 characters.

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

*Debt.* Interest rate risk exists primarily through our borrowing activities. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings or cash flows. While we had no fixed or variable rate borrowings outstanding at March 31, 2022, we could be exposed to market risk from changes in risk-free interest rates if we incur variable rate debt in the future as interest expense will fluctuate with changes in SOFR. Based on our current and expected levels of exposed liabilities, we estimate that a hypothetical 100 basis point change (up or down) in interest rates based on one-month SOFR would not have a material impact on our results of operations and financial condition.

*LIBOR Transition.* Beginning December 31, 2021, banks stopped reporting information used to set LIBOR as their reporting obligations ceased. The cessation of certain LIBOR tenures beginning as of December 31, 2021 and future cessation of other tenures, including the one-month LIBOR, effectively ended the usefulness of LIBOR and its publication. On January 26, 2022, we entered into the Credit Agreement which provides for interest rate calculations based on the use of the Secured Overnight Financing Rate (“SOFR”). The replacement of LIBOR with SOFR may result in interest payments that are higher than expected or that do not otherwise correlate over time with the payments that would have been made on such indebtedness for the interest periods if the applicable LIBOR rate was available in its current form.

### Foreign Currency Exchange Risk

Foreign currency exchange risk is primarily limited to our operation of Company-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 decrease in the value of foreign currencies relative to the U.S. dollar may affect the profitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry. The financial statements of our 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 the three and nine month ended March 31, 2022.

A hypothetical 10% weaker United States dollar against all foreign currencies at March 31, 2022 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.

### Raw Materials and Other Commodity Price Risk

We are exposed to market risk from changes in the cost of raw materials used in our manufacturing processes, principally logs, lumber, plywood, fabric and foam products. The cost of foam products, which are petroleum-based, is sensitive to changes in the price of oil. We are also exposed to risk with respect to transportation costs for delivering our products, including the cost of fuel. As commodity prices and transportation costs rise, we determine whether a price increase to our customers to offset these costs is warranted. To the extent that an increase in these costs would have a material impact on our results of operations, we believe that our competitors would experience a similar impact.

### Inflation Risk

Our results of operations and financial condition are presented based on historical cost. In future periods, we might be adversely affected by various aspects of inflation to the extent we are not able to overcome these issues through measures such as increasing the prices of our products, creating operational efficiencies and seeking lower cost alternatives. In addition, inflation-related risks could include increased costs for many products and services that are necessary for the operation of our business, as well as the impact of interest rate increases, which could have a negative effect on the housing market.

## Controls and procedures

As filed, 1,535 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chairman of the Board and Chief Executive Officer and our principal executive officer (“CEO”) and Senior Vice President, Chief Financial Officer and Treasurer and our principal financial officer (“CFO”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that, as of March 31, 2022, our disclosure controls and procedures are effective to provide reasonable assurance that information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in 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 the CEO and CFO, 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 third quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 4,483 characters.

We operate in a changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, operating results or cash flows. We described in our 2021 Annual Report on Form 10-K the primary risks related to our business and periodically update those risks for material developments. For a detailed discussion of those risks that affect our business, refer to the risk factors identified in Part I, Item 1A – *Risk Factors* in our 2021 Annual Report on Form 10-K.

The risk factors set forth below update, and should be read in conjunction with, the risk factors and information disclosed in our 2021 Annual Report on Form 10-K. Except as presented below, there have been no material changes from the risk factors associated with our business as previously disclosed in our 2021 Annual Report on Form 10-K.

***Labor challenges could have a material adverse effect on our business and results of operations.***

In our current operating environment, due in part to COVID-19 and general macroeconomic factors, we continue to experience various labor challenges, including, for example significant competition for skilled manufacturing and production employees; pressure to increase wages as a result of inflationary pressures, and at times, a shortage of qualified full-time labor in certain geographies, particularly at our distribution facilities. Outside suppliers that we rely on have also experienced similar labor challenges. The future success of our operations depends on our ability, and the ability of third parties on which we rely, to identify, recruit, develop and retain qualified and talented individuals in order to supply and deliver our products. A prolonged shortage or inability to retain qualified labor could decrease our ability to effectively produce and meet customer demand and efficiently operate our distribution facilities, which could negatively impact our business and have a material adverse effect on our results of operations. Higher wages to attract new and retain existing employees, as well as higher costs to purchase raw materials or services from such third parties, could also negatively impact our results of operations.

***Government-imposed COVID-19 vaccine mandates could lead to labor disruptions, which could have a material adverse effect on our business and results of operations.***

On September 9, 2021, President Biden issued an executive order obligating parties that contract with the United States federal government to require their employees to be fully vaccinated against COVID-19, with limited exceptions for certain accommodations including medical disabilities or sincerely held religious beliefs. Additionally, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) issued an emergency temporary standard (“ETS”) requiring most private employers with 100 or more workers to mandate COVID-19 vaccination or produce a weekly test for all employees Due to our United States government GSA contract, we are classified as a government contractor. We are also a company with more than 100 employees, which could subject us to additional vaccine and testing mandates in jurisdictions in which we operate our business. There could also be potential conflict with actions by certain states that are in conflict with the federal mandate. Given current information and uncertainty surrounding if the mandates are legal and when they become effective, it is not possible to predict with certainty the impacts the mandates would have on us. Currently, the Biden Administration’s executive order, as well as the subsequent guidance by the federal government, are facing legal challenges in federal courts. While we are not presently required to comply with a vaccine mandate or submit to weekly COVID-19 testing, the implementation of any such mandates may result in increased costs, labor disruptions or employee attrition, which could be material as a substantial number of our employees are based in areas of the United States where vaccination rates are below the national average. If we lose employees as a result of these mandates, it will be difficult in the current competitive labor market to find qualified replacement employees, and this could have an adverse effect on future revenues and costs, which could be material. Accordingly, the mandates, if implemented, could have a material adverse effect on our business and results of operations.

Filed Apr 28, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-010090. Last ingested by Listed: Nov 2, 2026, 20:01 ET. No prices; not investment advice.