# Ethan Allen Interiors Inc: Form 10-Q for the period ended Sep 30, 2022

- Company: [Ethan Allen Interiors Inc](/companies/etd.md) (CIK 896156)
- Form: 10-Q
- Filed: 2022-10-26
- Accepted by EDGAR: Oct 26, 2022, 16:31 ET
- Period: 2022-09-30
- Accession: 0001437749-22-024800
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/896156/000143774922024800/eth20220930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/896156/000143774922024800/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-01 to 2022-09-30 | $214.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-01 to 2022-09-30 | $84.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-01 to 2022-09-30 | $129.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-01 to 2022-09-30 | $92.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-01 to 2022-09-30 | $39.6m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-07-01 to 2022-09-30 | $10.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-01 to 2022-09-30 | $29.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.17 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-01 to 2022-09-30 | $1.17 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-01 to 2022-09-30 | 25,560,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-07-01 to 2022-09-30 | $38.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-07-01 to 2022-09-30 | $3.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2022-07-01 to 2022-09-30 | $20.9m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2022-09-30 | $92.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $351.7m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $721.8m | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $208.3m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $306.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-09-30 | $415.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 53,561 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 2022 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
- 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

17

### 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 novel coronavirus (“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: 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 has in the past and may in the future 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 and imported finished goods 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; significant increased costs or potential liabilities as a result of environmental laws and regulations aimed at combating climate change; risk to reputation and stock price related to future disclosures on Environmental, Social and Governance (“ESG”) matters; 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; 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; reliance on certain key personnel, loss of key personnel or inability to hire additional qualified personnel; a shortage of qualified labor within our operations and our supply chain; 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; and other factors disclosed in Part I, Item 1A. Risk Factors, in our 2022 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. We provide complimentary interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of September 30, 2022, the Company operates 139 retail design centers; 135 located in the United States and four in Canada. Our 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 a kiln dry lumberyard in the United States, two upholstery manufacturing plants in Mexico and one case goods manufacturing plant in Honduras. Approximately 75% of our products are manufactured or assembled in the North American plants. We also contract with various suppliers located in Europe, Asia and other various countries to produce products that support our business.

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

*Strategy.* Our strategy emphasizes the aim to position Ethan Allen as a preferred brand offering complimentary design service together with products of superior style, quality, and value to provide customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we continue to expand our reach to a broader consumer base through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We continuously monitor changes in home fashion trends through industry events and fashion shows, internal market research, and regular communication with our retailers and design center design professionals who provide valuable input on consumer trends.

*Talent.* Our employees, which we refer to as associates, are dedicated to helping each customer create a place that they will love to come home to everyday. We operate our business 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.

*Competitive Advantages.* Our competitive advantages arise from:

- offering a wide array of custom made-to-order products across upholstery, case goods, and accent product categories;
- complimentary design service of our interior design professionals combined with technology;
- our North American manufacturing workshops providing customization capabilities and high-quality products of the finest craftsmanship;
- our strong retail network, both of Company-operated locations and independent licensees;
- our 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.

As we celebrate our ninth decade as innovative interior designers, manufacturers and retailers, we must remain focused on our next decade of business as we continue the journey from the sale of furniture to a premier provider of interior design and purveyor of quality custom-made home furnishings, combining personal service with technology.

*Fiscal 2023 First Quarter in Review (1).* We are pleased with our first quarter performance, as we seek to continue delivering value to our shareholders through executing our strategic initiatives. Our vertically integrated enterprise remains key to our success and is a competitive advantage for us as approximately 75% of our products are made in our North American manufacturing workshops. Constant reinvention through ongoing reviews of our merchandising, marketing, technology, logistics and our retail operations, positions us to deliver value to our shareholders. Our manufacturing and logistics operations are key to our overall strategy to generate production efficiencies and drive profitability. We believe our commitment to constant reinvention while maintaining an entrepreneurial attitude under a single enterprise model will continue to position us for future growth.

We had a strong performance during the first quarter of fiscal 2023 as we delivered net sales growth of 17.7%, a gross margin of 60.4%, an adjusted operating margin of 17.6% and adjusted diluted earnings per share of $1.11. Cash generated from operations totaled $38.4 million and we returned $20.9 million to shareholders through cash dividends. We ended the first quarter with a strong balance sheet, including cash on hand of $92.9 million and short-term investments of $49.6 million, while expanding our operating margins through disciplined cost and expense controls. Reflecting the strength of our balance sheet and strong history of returning capital to shareholders, our Board declared and paid both a regular quarterly cash dividend of $0.32 per share as well as a special dividend of $0.50 per share in August 2022.

(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.

### 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 September 30, 2022 | % of Sales | % Chg | 2021 | % of Sales | % Chg |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $214.5 | 100.0% | 17.7% | $182.3 | 100.0% | 20.7% |
| Gross profit | $129.6 | 60.4% | 18.7% | $109.2 | 59.9% | 27.3% |
| Operating income | $39.7 | 18.5% | 44.9% | $27.4 | 15.0% | 134.2% |
| Adjusted operating income(1) | $37.7 | 17.6% | 35.9% | $27.7 | 15.2% | 125.4% |
| Net income | $29.9 | 13.9% | 48.3% | $20.2 | 11.1% | 115.5% |
| Adjusted net income(1) | $28.4 | 13.2% | 39.1% | $20.4 | 11.2% | 128.1% |
| Diluted EPS | $1.17 |  | 48.1% | $0.79 |  | 113.5% |
| Adjusted diluted EPS(1) | $1.11 |  | 38.8% | $0.80 |  | 122.2% |
| Cash flow from operating activities | $38.4 |  | 126.2% | $17.0 |  | (59.7%) |
| Adjusted annualized return on equity(1) | 27.3% |  |  | 21.8% |  |  |
| Wholesale written orders |  |  | (7.2%) |  |  | 8.1% |
| Retail written orders |  |  | (8.6%) |  |  | 6.1% |

(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 2023 Independent retailers | Company- operated | Total | Fiscal 2022 Independent retailers | Company- operated | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Balance at July 1 | 155 | 141 | 296 | 161 | 141 | 302 |
| New locations | - | - | - | 3 | - | 3 |
| Closures | - | (2) | (2) | (4) | - | (4) |
| Transfers | - | - | - | - | - | - |
| Balance at September 30 | 155 | 139 | 294 | 160 | 141 | 301 |
| Relocations (in new and closures) | - | - | - | - | 1 | 1 |
| Retail Design Center geographic locations: |  |  |  |  |  |  |
| United States | 33 | 135 | 168 | 34 | 136 | 170 |
| Canada | - | 4 | 4 | - | 5 | 5 |
| China | 105 | - | 105 | 108 | - | 108 |
| Other Asia | 11 | - | 11 | 11 | - | 11 |
| Middle East and Europe | 6 | - | 6 | 7 | - | 7 |
| Total | 155 | 139 | 294 | 160 | 141 | 301 |

20

### Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three months ended September 30, 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 2023 First Quarter compared with Fiscal 2022 First Quarter

*(in thousands)*

|  | Three months ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Consolidated net sales | $214,530 | $182,327 | 17.7% |
| Wholesale net sales | $114,651 | $109,448 | 4.8% |
| Retail net sales | $183,658 | $154,986 | 18.5% |
| Consolidated gross profit | $129,616 | $109,192 | 18.7% |
| Consolidated gross margin | 60.4% | 59.9% |  |

**Consolidated net sales** were $214.5 million, an increase of 17.7% compared to the prior year period primarily due to 18.5% growth in retail sales through our Company-operated design centers combined with a 4.8% increase in wholesale net shipments. We continue to experience elevated demand for our products, which has led to written orders being above pre-pandemic levels, despite a decrease in design center traffic. Our strategies to expand manufacturing production, increase available inventory and work through our significant backlog led to strong sales in the first quarter of fiscal 2023. Previous constraints, including COVID-related shutdowns, labor disruptions, supply chain challenges, shipping delays and raw material availability, have eased in recent quarters, which reduced the time to convert written orders to delivered shipments. Beginning approximately six months ago, 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 first quarter. The increased net sales have helped us to reduce existing wholesale order backlog by 24.4% from a year ago. As we continue to work through our 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 4.8% to $114.7 million primarily due to higher contract sales as well as an increase in intersegment sales to our Company-operated design centers partially offset by a reduction in sales to domestic dealers and international sales. Excluding intersegment sales to our retail segment, wholesale net sales increased 12.9% from higher contract sales, including improved shipments to the United States government General Services Administration (“GSA”). During the first quarter of fiscal 2023, we reported written order growth from the GSA and when combined with high backlog and increased production, led to an increase in net sales during the period. Our international net sales were down 39.7% due to a reduction in net sales to China, which continues to decline primarily from prolonged COVID-19 related lockdowns. Our sales to international independent retailers represented 1.9% of total wholesale net sales compared to 3.2% in the prior year period.

Wholesale written orders, which represent orders booked through all of our channels, were down 7.2% in the first quarter of fiscal 2023 compared with the first quarter of fiscal 2022. 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 first quarter, our independent North American retail network orders were down 10.0%, international orders, including orders from China, declined 48.2% and orders from our Company-operated design centers were down 9.3%. Partially offsetting these decreases was a 5.1% increase in contract orders, including orders from the GSA. When compared to the first quarter of fiscal 2020 (pre-pandemic levels), written orders from our Company-operated design centers were up 10.6% while our independent North American retail network rose 1.0%. We ended the fiscal 2023 first quarter with wholesale backlog of $105.6 million, down 24.4% from a year ago but still up $3.3 million or 3.2% from June 30, 2022. The number of weeks of wholesale backlog as of September 30, 2022 was down 23.8% compared to last year, with notable improvements seen within upholstery and case goods as production improved and exceeded pre-COVID-19 levels. In the near-term, our teams are effectively managing the business to work through the higher order backlog and to service our customers. We remain focused on 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 18.5% to $183.7 million. There was a 19.8% increase in net sales in the United States, while net sales from our Canadian design centers decreased 25.8%. Retail net sales grew year over year primarily from high backlog that led to higher deliveries, price increases enacted in the past 12 months, increased premier home delivery revenue and steady production levels within manufacturing. Canadian retail net sales were lower in the quarter as a result one less design center in Canada combined with temporary disruptions within the local service center that impacted delivery timing. While retail written orders decreased 8.6% year over year, they were 7.4% above the first quarter of fiscal 2020 (pre-pandemic levels). Despite ongoing demand for our relevant products and strong execution at the design center level, the impact of ongoing high inflation, concerns regarding a recession, uncertainty in the macroeconomic environment and higher interest rates, have contributed to the softening of consumer interest in home furnishings and is reflected in a decrease in quarterly traffic compared to prior year. We remain focused on providing exceptional personal service from design to delivery, investing in digital design capabilities and interactive communication technologies, refining and repositioning our product offerings to reach a larger client base, and leveraging our vertically integrated structure. During fiscal 2023, we plan to open or relocate several design centers within the United States. As of September 30, 2022, there were 139 Company-operated design centers compared with 141 in the prior year period.

**Consolidated gross profit** increased 18.7% to $129.6 million compared with the prior year first quarter due to sales growth within both the wholesale and retail segments, a change in the sales mix, product pricing actions taken, benefits from expanded manufacturing operations, disciplined promotional activity, and a favorable product mix partially offset by higher input costs. Retail gross profit increased by 18.9% due to a 18.5% increase in net shipments combined with a 20-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 12.2% in the current year first quarter due to a 4.8% increase in wholesale net shipments and a 220-basis point improvement in gross margin from efficiencies gained with higher manufacturing production levels and product pricing actions taken in the past 12 months. Higher year over year manufacturing production within case goods and improved imported receipts of home accents helped drive sales growth within each of these categories. Product pricing actions taken in the past 12 months have helped to partially offset the higher raw material and freight costs. Our ability to keep pace with inflationary pressures that we are experiencing helped improve our wholesale gross profit during the first quarter. Each product category within our wholesale segment expanded its gross margin, which led to higher gross profit.

**Consolidated gross margin** was 60.4% compared with 59.9% a year ago due to a change in the sales mix, a favorable product mix, product pricing actions taken and higher manufacturing productivity and efficiency partially offset by higher input costs. Retail sales, as a percentage of total consolidated sales, were 85.6% in the current year first quarter, up from 85.0% 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 consolidated gross margin to moderate and range between 56.0% to 58.0% due to rising inflation and a return of our sales mix to more historical norms.

*(in thousands)*

|  | Three months ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Selling, general and administrative (“SG&A”) expenses | $91,962 | $81,577 | 12.7% |
| Restructuring and other impairment charges, net of gains | $(1,996) | $255 | nm |
| Consolidated operating income | $39,650 | $27,360 | 44.9% |
| Consolidated operating margin | 18.5% | 15.0% |  |
| Wholesale operating income | $15,413 | $12,819 | 20.2% |
| Retail operating income | $21,989 | $14,345 | 53.3% |

**SG&A expenses** increased to $92.0 million, or 42.9% of net sales, compared with $81.6 million, or 44.7% of net sales in the prior year period. SG&A expenses, when expressed as a percentage of sales, decreased 180 basis points in the first quarter of fiscal 2023, compared with the same period in the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 12.7% while consolidated net sales grew at a much faster rate of 17.7%, which led to improved operating leverage. The 12.7% increase in SG&A expenses was primarily driven by higher selling costs of 17.8% combined with a 5.0% increase in general and administrative expenses. Wholesale selling costs grew 7.4% as fuel and freight costs increased from higher sales volumes and rising commodity prices. Retail selling expenses were up 21.6% due to the 18.5% increase in net sales, which drove higher delivery costs and variable compensation, higher labor rates and fuel charges and increased marketing spend. For the first quarter of fiscal 2023, we increased our advertising in various mediums including national television and direct mail, thereby increasing our overall advertising spend to 2.5% of net sales compared to 2.0% in the prior year first quarter. 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. General and administrative expenses increased 5.0% during the just completed first quarter primarily due to higher compensation, increased occupancy and maintenance costs from new and existing locations, incremental insurance costs and additional technology and software maintenance to support our infrastructure.

**Restructuring and other impairment charges, net of gains** was a reported $2.0 million gain compared to a loss of $0.3 million in the prior year period. On August 1, 2022, we completed a sale-leaseback transaction with an independent third party for the land, building and related fixed assets of a retail design center. The design center was leased back to Ethan Allen via a multi-year operating lease agreement. As part of the transaction, we received gross proceeds of $8.4 million, less closing costs of $0.3 million, and recognized a gain of $2.3 million in the first quarter of fiscal 2023. As of September 30, 2022, the deferred liability balance, which will be recognized over the remaining term of the related leaseback, was $4.8 million, with $2.6 million in *Other current liabilities* and $2.2 million in *Other long-term liabilities* on our consolidated balance sheet. In the year ago first quarter, we recorded pre-tax charges of $0.3 million related to the closing of our Atoka, Oklahoma distribution center and other lease exit costs.

**Consolidated operating income** was $39.7 million compared with $27.4 million in the prior year period. Adjusted operating income, which excludes restructuring and other charges, was $37.7 million, or 17.6% of net sales compared with $27.7 million, or 15.2% of net sales in the prior year period. The increase in operating income was driven by the $32.2 million increase in consolidated net sales, retail and wholesale gross margin expansion, and strong cost containment measures partially offset by higher selling expenses including increased delivery and freight costs combined with higher marketing spend. Our ability to maintain disciplined cost and expense controls, including strong cost containment measures, and tight expense management within our general and administrative expenses, continues to help drive operating income growth. Compared to the end of the first quarter of the prior year period, our headcount is down 44 associates or 1.0%. However, compared to September 2019, our global headcount is down 472 associates. Our ability to operate the business with global headcount down 10.2% from 2019 has contributed to consolidated operating income and margin expansion. The majority of the headcount reductions since 2019 were within our retail segment, which is down 35.2% from 2019 while wholesale is up 6.4% from 2019 due to our ramping up of manufacturing capacity.

**Wholesale operating income** was $15.4 million or 13.4% of net sales, an increase compared with $12.8 million or 11.7% of net sales in the prior year period due to wholesale net sales growth of 4.8%, a 220-basis point improvement in wholesale gross margin, cost containment measures within SG&A, prudent hiring in the past 12 months and manufacturing production levels that have now exceeded pre-COVID-19 pandemic levels. These benefits were partially offset by increased distribution costs from incremental volume and price, increased marketing spend, additional technology and software maintenance costs and incremental compensation from higher headcount.

**Retail operating income** was $22.0 million, or 12.0% of sales, compared with $14.3 million, or 9.3% of sales in the prior year period. The current year retail operating income included the gain on the sale-leaseback transaction. Adjusted retail operating income was $20.0 million, up 37.8% over the prior year first quarter. Adjusted retail operating margin improved to 10.9% primarily due to the 18.5% increase in net sales, a 20-basis point expansion in retail gross margin and our management of operating expenses, which grew at a lower rate than net sales. While selling, delivery, advertising and variable compensation expenses were up, retail SG&A expenses, when expressed as a percentage of net sales, decreased 140 basis points. This decrease was due to the ability to leverage fixed costs and the adherence to strong cost control measures while having strong net delivered sales from a high order backlog and prudent hiring, with most being added as designers and operational support staff.

*(in thousands, except per share data)*

|  | Three months ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| Income tax expense | $10,111 | $7,187 | 40.7% |
| Effective tax rate | 25.3% | 26.3% |  |
| Net income | $29,880 | $20,153 | 48.3% |
| Diluted EPS | $1.17 | $0.79 | 48.1% |

**Income tax expense** was $10.1 million compared with $7.2 million in the prior year first quarter primarily due to the $12.7 million increase in income before income taxes. Our consolidated effective tax rate was 25.3% compared with 26.3% in the prior year comparable period. Our effective tax rate of 25.3% varies from the 21% federal statutory rate primarily due to state taxes.

**Net income** was $29.9 million compared with $20.2 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, was $28.4 million, up 39.1% from the prior year period due to stronger net sales, improved retail, wholesale and consolidated gross margins, cost containment measures and more efficient manufacturing productivity.

**Diluted EPS** was $1.17 compared with $0.79 per diluted share in the prior year comparable period. Adjusted diluted EPS was $1.11, up 38.8% compared with the prior year period driven by higher net sales, gross margin, and cost containment measures.

### Reconciliation of Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including 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 Operating Income / Operating Margin | Three months ended September 30, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: |
| GAAP Operating income | $39,650 | $27,360 | 44.9% |
| Adjustments (pre-tax) \* | (1,958) | 368 |  |
| Adjusted operating income \* | $37,692 | $27,728 | 35.9% |
| Consolidated Net sales | $214,530 | $182,327 | 17.7% |
| GAAP Operating margin | 18.5% | 15.0% |  |
| Adjusted operating margin \* | 17.6% | 15.2% |  |
| Consolidated Adjusted Net Income / Adjusted Diluted EPS |  |  |  |
| GAAP Net income | $29,880 | $20,153 | 48.3% |
| Adjustments, net of tax \* | (1,463) | 276 |  |
| Adjusted net income | $28,417 | $20,429 | 39.1% |
| Diluted weighted average common shares | 25,560 | 25,451 |  |
| GAAP Diluted EPS | $1.17 | $0.79 | 48.1% |
| Adjusted diluted EPS \* | $1.11 | $0.80 | 38.8% |
| Wholesale Adjusted Operating Income / Adjusted Operating Margin |  |  |  |
| Wholesale GAAP operating income | $15,413 | $12,819 | 20.2% |
| Adjustments (pre-tax) \* | (4) | 178 |  |
| Adjusted wholesale operating income \* | $15,409 | $12,997 | 18.6% |
| Wholesale net sales | $114,651 | $109,448 | 4.8% |
| Wholesale GAAP operating margin | 13.4% | 11.7% |  |
| Adjusted wholesale operating margin \* | 13.4% | 11.9% |  |
| Retail Adjusted Operating Income / Adjusted Operating Margin |  |  |  |
| Retail GAAP operating income | $21,989 | $14,345 | 53.3% |
| Adjustments (pre-tax) \* | (1,954) | 190 |  |
| Adjusted retail operating income \* | $20,035 | $14,535 | 37.8% |
| Retail net sales | $183,658 | $154,986 | 18.5% |
| Retail GAAP operating margin | 12.0% | 9.3% |  |
| Adjusted retail operating margin \* | 10.9% | 9.4% |  |

24

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

*(in thousands)*

|  | Three months ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Gain on sale-leaseback transaction (retail) | $(2,257) | $- |
| Severance and other charges (wholesale) | (4) | 178 |
| Severance, lease exit costs and other charges (retail) | 303 | 190 |
| Adjustments to operating income | $(1,958) | $368 |
| Adjustments to income before income taxes | $(1,958) | $368 |
| Related income tax effects on non-recurring items(1) | 495 | (92) |
| Adjustments to net income | $(1,463) | $276 |

(1) Calculated using a tax rate of 25.3% in the current year and 25.1% in the prior year.

### Liquidity

We are committed to maintaining a strong balance sheet and continue to monitor our liquidity closely during this continued period of uncertainty and volatility globally, as well as within our industry. Our sources of liquidity include cash and cash equivalents, short-term investments 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, invest in capital expenditures, and fulfill cash requirements for day-to-day operations and contractual obligations. As of September 30, 2022, the Company had a strong balance sheet, including available liquidity of $263.4 million as summarized below.

*(in thousands)*

|  | September 30, 2022 | June 30, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $92,878 | $109,919 |
| Short-term investments | 49,566 | 11,199 |
| Availability under existing credit facility | 120,952 | 120,952 |
| Total Liquidity | $263,396 | $242,070 |

As of September 30, 2022, we had working capital of $143.4 million compared to $131.1 million at June 30, 2022 and a current ratio of 1.69 at September 30, 2022, comparable to 1.61 at June 30, 2022 and 1.29 at September 30, 2021. Included in our cash and cash equivalents at September 30, 2022, is $7.3 million held by foreign subsidiaries, of which $7.2 million we have determined to be indefinitely reinvested.

#### Summary of Cash Flows

At September 30, 2022, we held cash and cash equivalents of $92.9 million compared with $109.9 million at June 30, 2022. Cash and cash equivalents aggregated to 12.9% of our total assets at September 30, 2022, compared with 13.8% of our total assets a year prior and 15.3% at June 30, 2022. In addition, we had short-term investments of $49.6 million at September 30, 2022, which we expect will further enhance our returns on cash, compared with $11.2 million at June 30, 2022. Our short-term investments at September 30, 2022 are within U.S. Treasury Bills with maturities of less than one year.

Our cash and cash equivalents decreased $17.0 million or 15.5% during the first three months of fiscal 2023 due to $38.4 million in net purchases of investments, $20.9 million in cash dividends paid and capital expenditures of $3.2 million partially offset by net cash provided by operating activities of $38.4 million and $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022.

The following table illustrates the main components of our cash flows for the three months ended September 30, 2022 and 2021 (in millions):

| Operating activities | Three months ended September 30, 2022 | 2021 |
| --- | ---: | ---: |
| Net income | $29.9 | $20.2 |
| Non-cash operating lease cost | 7.8 | 7.5 |
| Restructuring and other impairment charges, net of gains | (2.0) | 0.3 |
| Restructuring payments | (0.2) | (0.4) |
| Depreciation and amortization and other non-cash items | 3.6 | 5.3 |
| Change in operating assets and liabilities | (0.7) | (15.9) |
| Total provided by operating activities | $38.4 | $17.0 |
| Investing activities |  |  |
| Capital expenditures | $(3.2) | $(1.5) |
| Proceeds from sales of property, plant and equipment | 8.1 | - |
| Purchases of investments, net of sales | (38.4) | - |
| Total used in investing activities | $(33.5) | $(1.5) |
| Financing activities |  |  |
| Dividend payments | (20.9) | (25.4) |
| Taxes paid related to net share settlement of equity awards | (0.8) | (0.8) |
| Payments on financing leases | (0.1) | (0.1) |
| Total used in financing activities | $(21.8) | $(26.3) |

***Cash Provided by (Used in) Operating Activities.*** We generated $38.4 million in cash from operating activities during the first three months of fiscal 2023, an increase from $17.0 million in the prior year period primarily due to an improvement in working capital and higher net income. The increase in working capital was primarily from a reduction in customer deposits as net shipments outpaced written orders, improved collections on accounts receivable, which converted shipments to cash faster and the payment of annual bonuses partially offset by a reduction in inventory levels. In addition, the increase in other assets and liabilities was primarily related to the sale-leaseback transaction completed in August 2022 and higher income taxes payable. Restructuring payments made during the first three months of fiscal 2023 were $0.2 million compared to $0.4 in the prior year and related primarily to severance and rent paid for an exited leased space.

***Cash Provided by (Used in) Investing Activities.*** Cash used in investing activities was $33.5 million, an increase from $1.5 million in the prior year period due to $38.4 million of net purchases of investments (net of proceeds from sales of investments) and an increase in capital expenditures, partially offset by $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022. During the first quarter of fiscal 2023, we invested $49.6 million in U.S. Treasury Bills with maturities of one year or less while selling our previously held investments in municipal bonds, commercial paper and certificates of deposit for $11.2 million. These short-term investments are reported within *Investments* in our consolidated balance sheet as of September 30, 2022. Capital expenditures of $3.2 million during the first three months of fiscal 2023 primarily related to efficiency and safety upgrades to our Silao, Mexico manufacturing plant, spending on design center relocations and improvements and investments in technology upgrades and infrastructure.

***Cash Provided by (Used in) Financing Activities.*** Cash used in financing activities was $21.8 million during the first three months of fiscal 2023 compared with $26.3 million in the prior year period. The decrease in cash used of $4.5 million was primarily due to the decrease in the special dividend paid, which was $0.50 in the current year compared to $0.75 a year ago. This decrease was partially offset by a 28.0% increase in the regular quarterly cash dividend over the prior year.

***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. At September 30, 2022 and June 30, 2022, we held $0.8 million and $1.0 million, respectively, of restricted cash related to an Ethan Allen insurance captive.

***Exchange Rate Changes.*** Due to changes in exchange rates, our cash and cash equivalents were impacted by $0.3 million during the first three months of fiscal 2023. 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.*** On January 26, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides us with an option to increase the size of the Facility up to an additional amount of $60 million. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. 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 September 30, 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. We incurred financing costs of $0.5 million during fiscal 2022, which are being amortized as interest expense over the remaining life of the Facility using the effective interest method.

***Letters of Credit -*** At both September 30, 2022 and June 30, 2022, there was $4.0 million of standby letters of credit outstanding under the Facility.

#### Uses of Liquidity

***Capital Expenditures.*** Capital expenditures during the first three months of fiscal 2023 totaled $3.2 million compared with $1.5 million in the prior year period. The increase is primarily related to $2.0 million of spending on our Upholstery and Case Goods manufacturing facilities to further improve their capacity, safety and efficiency. The remaining spend of $1.2 million was for planned retail design center openings, relocations and project improvements, as well as additional investments in technology. In the first three months of fiscal 2023, 61% of our total capital expenditures were for manufacturing capital projects while 39% related to retail design center development, expansion, and renovation as well as additional technology improvements.

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 2023 capital expenditures to be moderately above fiscal 2022 levels as we further invest in technology, increase manufacturing 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 three months of fiscal 2023. On August 16, 2022, our Board declared a $0.50 per share special cash dividend in addition to our regular quarterly cash dividend of $0.32 per share, which was paid to shareholders on August 30, 2022.

Although we expect to continue to declare and pay comparable quarterly cash dividends for the foreseeable future, the payment of future cash dividends is within the discretion of our Board of Directors and will depend on our earnings, operations, financial condition, capital requirements and general business outlook, among other factors. Our credit agreement also includes covenants that includes limitations on our ability to pay dividends.

***Share Repurchase Program.*** There were no share repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during the first three months of fiscal 2023 or 2022. At September 30, 2022, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our Share Repurchase Program. 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.

***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 2022 Annual Report on Form 10-K, as of June 30, 2022, we had total contractual obligations of $193.2 million, including $131.6 million related to our operating lease commitments and $40.8 million of open purchase orders. Except for operating lease payments totaling $8.2 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 our 2022 Annual Report on Form 10-K. During the first three months of fiscal 2023, $5.5 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 2023.

### 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 2022 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first three months of fiscal 2023 from those disclosed in our 2022 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 2022 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first three months of fiscal 2023 from those disclosed in our 2022 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, 8,089 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 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 September 30, 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 the Secured Overnight Financing Rate (“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.

***Cash and Cash Equivalents and Investments.*** The fair market value of our cash and cash equivalents at September 30, 2022 was $92.9 million while our short-term investments balance was $49.6 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. Our investments consist of U.S. Treasury Bills with maturities of one year or less and at fair value based on observable inputs. Our primary objective for holding available-for-sale securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. Pursuant to our established investment guidelines, we try to achieve high levels of credit quality, liquidity and diversification. At any time, a sharp rise in market interest rates could have an impact on the fair value of our available-for-sale securities portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have an adverse impact on interest income for our investment portfolio. However, because of our investment policy and the short-term nature of our investments, our financial exposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash equivalents and investments have been materially impacted by current market events. Our available-for-sale securities are held for purposes other than trading and are not leveraged as of September 30, 2022. We monitor our interest rate and credit risks and believe the overall credit quality of our portfolio is strong. It is anticipated that the fair market value of our cash equivalents and short-term investments will continue to be immaterially affected by fluctuations in interest rates.

### Foreign Currency Exchange Risk

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A 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 any of the fiscal periods presented in this Annual Report on Form 10-K.

A hypothetical 10% weaker United States dollar against all foreign currencies at September 30, 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.

### Duties and Tariffs Market Risk

We are exposed to market risk with respect to duties and tariffs assessed on raw materials, component parts, and finished goods we import into countries where we operate. Additionally, we are exposed to duties and tariffs on our finished goods that we export from our assembly plants to other countries. As these tariffs and duties increase, 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.

### 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. While it is difficult to accurately measure the impact of recent inflationary pressure, we believe any inflationary impact on our product and operating costs would be offset by our ability to increase selling prices, create operational efficiencies, and seek lower cost alternatives.

### Commercial Real Estate Market Risk

We have potential exposure to market risk related to conditions in the commercial real estate market. As of September 30, 2022, there were 139 Company-operated retail design centers, of which 49 are owned and 90 are leased. Our retail segment real estate holdings could suffer significant impairment in value if we are forced to close design centers and sell or lease the related properties during periods of weakness in certain markets. We are also exposed to risk related to conditions in the commercial real estate rental market with respect to the right-of-use assets we carry on our balance sheet for leased design center locations and warehouse and distribution facilities. At September 30, 2022, the unamortized balance of such right-of-use assets totaled $99.5 million. Should we have to close or otherwise abandon one of these leased locations, we could incur additional impairment charges if rental market conditions do not support a fair value for the right of use asset in excess of its carrying value.

## Controls and procedures

As filed, 1,473 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chairman of the Board, President and Chief Executive Officer (“CEO”) and Senior Vice President, Chief Financial Officer and Treasurer (“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 September 30, 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 were 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 first quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 613 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 2022 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 2022 Annual Report on Form 10-K. There have been no material changes to our risk factors during the first quarter of fiscal 2023.

Filed Oct 26, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-024800. Last ingested by Listed: Nov 6, 2026, 16:59 ET. No prices; not investment advice.