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

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

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, 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 interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of December 31, 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 an interior design destination and a preferred brand offering products of superior style, quality, and value to customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we seek to constantly reinvent our projection and product offerings through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We seek to 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.

In December 2022 Ethan Allen celebrated 90 years of innovation at its 2022 Virtual Convention, which highlighted the Company’s rich history in classic style with a modern perspective, the service of its vertically integrated manufacturing and logistics networks, the strengthening of the Company’s retail network and the importance of being an interior design destination. Our strategy and focus will be on continuing to position ourselves as a premier interior design destination and strengthening our vertically integrated structure through talent and the use of technology within design centers, on the web, and throughout manufacturing, logistics, and product development.

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. At December 31, 2022, our employee count totaled 3,943, with 2,863 employees in our wholesale segment and 1,080 in our retail segment. We are pleased in the continued strengthening of our teams and the performance of our associates during fiscal 2023 while at the same time being able to reduce headcount through operational efficiencies. Our employee count decreased 7.0% compared to June 30, 2022, with 120 less associates in retail and 176 less associates in our wholesale segment.

Competitive Advantages. We believe our competitive advantages arise from:

• being a leading interior design destination offering a wide array of custom made-to-order products across upholstery, case goods, and accent product categories;
• having one of the world's largest interior design networks, combining talent 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.

Fiscal 2023 Second Quarter in Review (1). We are pleased with our second quarter performance, as we seek to continue delivering value to our shareholders, despite operating in a challenging economic environment. We believe that these results highlight the strengths of our vertically integrated enterprise as we produced strong gross and operating margins. While written orders have declined and returned to near pre-pandemic historical levels, our sales surpassed $200 million aided by our commitment to servicing our backlog and bringing it more current. As economic and financial conditions have slowed and become more uncertain, we remain cautiously optimistic that our initiatives have positioned us to maximize our vertically integrated company.

On a year over year basis, our retail written orders were down 16.3%, but were comparable to pre-pandemic levels. Backlogs were significantly reduced in the quarter due to strong delivered sales and softening demand. With that said, our backlog still remains approximately 50% higher than our pre-pandemic levels. Net sales totaled $203.2 million, a decrease of 2.4% compared to the prior year quarter. Both gross and operating margins increased compared to the prior year quarter, with a consolidated gross margin of 61.0% and an adjusted operating margin of 18.1% that led to adjusted diluted earnings per share growth of 15.8% to $1.10. Margin expansion was primarily due to pricing actions taken in last 12 months, product mix, a reduction in inbound freight costs and disciplined cost and expense control measures. Cash generated from operations totaled $2.5 million and we ended the quarter with cash on hand of $85.4 million and short-term investments of $55.0 million. Inventory balances continued to decrease as we sought to reduce our levels of inventory while also ensuring appropriate levels are maintained to service our customer base. Reflecting the continued strength of our balance sheet and strong history of returning capital to shareholders, our Board declared a regular quarterly cash dividend of $0.32 per share, which was paid on January 4, 2023.

(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).

(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.

Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three and six months ended December 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.

(in thousands)

21

Consolidated Net Sales

Consolidated net sales for the three months ended December 31, 2022 decreased $4.9 million or 2.4% compared to the prior year quarter primarily due to a decline of 8.3% in wholesale net shipments combined with a 4.4% reduction in retail sales through our Company-operated design centers. The prior year second quarter was one of the largest historical second quarter results for net sales. Compared to the second quarter of fiscal 2019, which is pre-pandemic and reflective of historical norms, net sales for the three months ended December 31, 2022 were up 3.0%.

Consolidated net sales for the six months ended December 31, 2022 increased $27.3 million or 7.0% compared to the prior year period due to retail sales growth of 6.2% partially offset by lower wholesale shipments of 2.0%. Previous constraints, including COVID-related shutdowns, labor disruptions, supply chain challenges, shipping delays and raw material availability have eased in the last 12 months allowing us to maintain steady manufacturing productivity and reduce the time to convert written orders to delivered shipments, which helped reduce our existing wholesale order backlog by 36.0% compared to the prior year. Our strategy remains focused on servicing and delivering our existing backlog at December 31, 2022, which is approximately 50% higher than pre-pandemic levels.

Wholesale Net Sales

Wholesale net sales for the three months ended December 31, 2022 decreased $9.7 million or 8.3% compared to the prior year quarter due to a decrease in intersegment sales to our Company-operated design centers, domestic dealers and international sales partially offset by higher contract sales. Excluding intersegment sales to our retail segment, wholesale net sales increased $2.9 million or 10.1% compared to the prior year quarter from higher contract sales, including shipments to the United States government General Services Administration (“GSA”). Our international net sales were down 48.8% compared to the prior year quarter due to a reduction in net sales to China and Southeast Asia as a result of the prolonged COVID-19 concerns within the region.

Wholesale net sales for the six months ended December 31, 2022 decreased $4.5 million or 2.0% compared to the prior year period primarily due to a reduction in intersegment sales to our Company-operated design centers and lower shipments to domestic and international dealers, which was partially offset by higher contract sales. Excluding intersegment sales to our retail segment, wholesale net sales increased 11.5% compared to the prior year period from higher contract sales. Our international net sales were down 44.1% compared to the prior year period due to a reduction in net sales to China and Southeast Asia. Sales to international independent retailers represented 0.9% of total wholesale net sales compared to 1.7% in the prior year period.

Wholesale written orders, which represent orders booked through all of our channels, were down 20.2% in the three months ended December 31, 2022 compared to the prior year second quarter. After the reopening of all our retail design centers in 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 second quarter, our independent North American retail network orders were down 12.3%, international orders were down 43.6% and orders from our Company-operated design centers were down 13.2%. In addition, contract orders were down 87.5% as the prior year second quarter saw strong contract business, driven largely by hospitality customers and the timing of incoming GSA orders.

Wholesale written orders were down 12.9% in the first six months of fiscal 2023 compared with the prior year period. As a result of the strong prior year first half, orders from our Company-operated design centers were down 11.1%, our contract orders declined 18.1%, our independent North American retail network orders were down 11.0% and our international orders, including orders from China, declined 46.2%. When compared to the first six months of fiscal 2019 (pre-pandemic levels), written orders from our Company-operated design centers were down 2.9%. We ended the fiscal 2023 second quarter with wholesale backlog of $78.5 million, down 36.0% from a year ago as we were able to reduce the number of weeks of wholesale backlog as of December 31, 2022 by 34.1% compared to last year, which brought our backlog to be more current. In the near-term, our teams are focused on efforts to effectively manage the business by continuing to work through our higher order backlog and to service our customers.

Retail Net Sales

Net sales from Company-operated design centers for the three months ended December 31, 2022 decreased $7.8 million or 4.4% compared to the prior year quarter. There was a 4.2% decrease in net sales within the United States, while net sales from our Canadian design centers decreased 8.8%. A year ago we experienced a significant surge in demand, which led to a high backlog and higher deliveries making it a difficult prior year comparison. In addition, we saw a decrease in retail shipments year over year due to lower production levels within our Upholstery manufacturing compared to the prior year. Manufacturing production levels still remain above pre-pandemic levels, but have slowed in the past three months as incoming written orders have slowed. These volume decreases were partially offset by the price increases we enacted in the past 12 months, an increase in average ticket price and increased premier home delivery revenue. While retail written orders decreased 16.3% year over year, they are nearing pre-pandemic historical norms and were 1.5% below the second quarter of fiscal 2019 (pre-pandemic levels). Prolonged high inflation, concerns regarding a recession, uncertainty in the macroeconomic environment and higher interest rates, continue to impact consumer behavior and is reflected in written order and traffic decreases year over year.

Retail net sales for the six months ended December 31, 2022 increased 6.2% to $355.4 million compared to the prior year period. There was a 6.9% increase in net sales in the United States, while net sales from our Canadian design centers decreased 16.9%. The retail net sales growth of 6.2% was primarily from high backlog that led to higher deliveries, price increases enacted in the past 12 months, increased premier home delivery revenue, additional clearance sales and manufacturing production levels that have remained above pre-pandemic levels. Canadian retail net sales were impacted by one less design center in Canada combined with temporary disruptions within the local service center that impacted delivery timing during the first quarter. While retail written orders decreased 12.3% year over year, they were 0.1% above the first six months of fiscal 2019, which we believe reflects continued demand for our relevant products in a softening demand environment partially due to strong execution at the design center level including incremental average ticket sales and a higher percentage of sales per traffic count. 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. We are currently working on plans to open or relocate a select number of design centers within the United States by the end of fiscal 2023. As of December 31, 2022, there were 139 Company-operated design centers compared with 141 in the prior year period.

Consolidated Gross Profit and Margin

Consolidated gross profit for the three months ended December 31, 2022 increased $1.8 million or 1.4% compared to the prior year quarter due to consolidated and wholesale gross margin expansion partially offset by a reduction in retail gross margin and lower consolidated net sales. Consolidated gross margin, as a percentage of net sales, for the three months ended December 31, 2022 was 61.0% compared with 58.8% in the prior year quarter. This consolidated gross margin expansion of 220 basis points offset the 2.4% decline in consolidated net sales, which led to gross profit increasing by 1.4% over the prior year. The 220-basis point increase in consolidated gross margin was driven by product pricing actions taken over the past 12 months, a favorable product mix, disciplined promotional activity and lower inbound freight costs. These gross margin drivers were partially offset by a change in our sales mix and a decrease in unit volume that led to higher unfavorable manufacturing overhead costs. Retail sales, as a percentage of total consolidated sales, were 84.5% in the current year second quarter, down from 86.3% in the prior year quarter. Our retail segment has a higher gross margin than our wholesale segment, thus the decrease in sales mix negatively impacted our consolidated gross margin. Despite an 8.3% decrease in net sales, our wholesale segment gross profit increased 22.9% in the current year second quarter, which was primarily attributable to product pricing actions taken in the past 12 months, change in product mix, lower inbound freight costs, efficiencies gained with higher manufacturing production levels within case goods and improved imported receipts of home accents. Product pricing actions taken in the past 12 months have helped to offset input costs that continue to face inflationary pressure. Each product category within our wholesale segment expanded its gross margin, which led to higher gross profit. Retail gross profit decreased by 6.2% due to a 4.4% decrease in net shipments combined with a 100-basis point decrease in gross margin. The reduction in our retail gross margin was driven by a change in product mix, increased wholesale dealer costs to purchase inventory and higher fees associated with offering 36-month interest financing to our customers partially offset by incremental home delivery revenue and an increase in average ticket sale.

Consolidated gross profit for the six months ended December 31, 2022 increased $22.2 million or 9.6% compared to the prior year period due to sales growth of 6.2% within our retail segment combined with consolidated and wholesale gross margin expansion. Consolidated gross margin was 60.7% during the first six months of fiscal 2023 compared with 59.3% in the prior period. The 140-basis point increase was driven by product pricing actions taken, disciplined promotional activity, benefits from expanded case goods manufacturing operations, a favorable product mix and lower inbound freight costs partially offset by a change in sales mix. Retail sales, as a percentage of total consolidated sales, were 85.1% in the first six months of fiscal 2023, down from 85.7% in the prior year period. Retail gross profit increased 5.3% due to the 6.2% increase in net shipments partially offset by a decline in gross margin. Our Retail gross margin was negatively impacted by higher prices to acquire inventory from wholesale combined with increased fees to offer our customers interest free financing partially offset by higher premier home delivery revenue and an increase in average ticket sale. Wholesale gross profit increased 17.2% for the first six months of fiscal 2023 primarily due to gross margin expansion from efficiencies gained with higher manufacturing production levels and product pricing actions taken in the past 12 months partially offset by a 2.0% reduction in net sales. 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 offset elevated input costs, although inbound freight costs have been on the decline for several months.

SG&A Expenses

(in thousands)

SG&A expenses for the three months ended December 31, 2022 decreased $2.5 million or 2.7% due to lower selling expenses and a reduction in general and administrative costs. Consolidated selling expenses were down 2.4% while general and administrative costs decreased 3.3%, indicative of strong cost control measures. When expressed as a percentage of net sales, SG&A expenses were 42.9% of net sales, compared with 43.1% of net sales in the prior year quarter as we were able to manage expenses in a declining sales environment. Wholesale selling expenses, which includes logistics, were down 9.2% as distribution costs decreased from lower sales volumes and declining freight rates partially offset by higher diesel fuel costs compared to a year ago. Retail selling expenses were down 0.1% due to lower designer variable compensation and labor costs offset by higher warehouse and delivery costs from increased contract rates and fuel surcharges. Total advertising expense during the second quarter of fiscal 2023 was equal to 2.0% of net sales, the same as in the prior year second quarter. We continue to utilize various advertising mediums including national television, direct mail and digital. Through our recent digital campaigns, we have substantially increased our digital marketing outreach, which helped us reach more households through the publication of our periodic digital magazine. Consolidated general and administrative expenses decreased 3.3% primarily due to lower retail occupancy costs, a reduction in professional and legal fees, and less employee compensation due to a lower headcount partially offset by increased employee benefit costs, including higher group insurance.

SG&A expenses for the six months ended December 31, 2022 increased $7.9 million or 4.6% due to higher selling expenses. Consolidated selling expenses were up 7.1% while general and administrative costs rose only 0.8%. When expressed as a percentage of net sales, SG&A expenses were 42.9% of net sales, a 90-basis point decrease compared to the prior year period due to higher sales volume relative to fixed costs. SG&A expenses were up 4.6% while consolidated net sales increased 7.0%, which led to improved operating leverage. Retail selling expenses increased 10.0% due to the 6.2% increase in Retail net sales, which drove higher delivery costs and variable compensation, increased contract rates and fuel surcharges and increased marketing spend. Wholesale selling costs declined 1.3% primarily from a 2.0% reduction in sales volume, which led to lower distribution and freight costs. For the six months of fiscal 2023, our consolidated advertising spend was equal to 2.3% of net sales, up from 2.0% in the prior year period. Consolidated general and administrative expenses increased by 0.8% for the first six months of fiscal 2023 primarily related to our disciplined approach to cost savings and expense controls, including our cost containment and expense management efforts.

Restructuring and Other Impairment Charges, Net of Gains

Restructuring and other impairment charges, net of gains for the three months ended December 31, 2022 was a gain of $0.2 million compared to a gain of $3.6 million in the prior year second quarter. The current year second quarter includes a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction completed on August 1, 2022, partially offset by $0.5 million related primarily to severance costs. In the year ago second quarter, we completed the sale of two properties for a combined pre-tax gain of $3.9 million, which was partially offset by $0.3 million related to severance.

Restructuring and other impairment charges, net of gains for the six months ended December 31, 2022 was a $2.2 million gain compared to a gain of $3.4 million in the prior year period. The recognized gain of $2.9 million from the sale-leaseback transaction was partially offset by $0.7 million in severance and other lease costs. In the first six months of last year, we completed the sale of two properties for a combined pre-tax gain of $3.9 million, which was partially offset by $0.5 million of severance and lease costs.

Consolidated Operating Income

Consolidated operating income for the three months ended December 31, 2022 increased $0.8 million or 2.1% and as a percentage of net sales was 18.2%, compared to 17.4% the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $36.9 million, or 18.1% of net sales compared with $32.8 million, or 15.7% of net sales in the prior year quarter. The increase in operating income was driven by gross margin expansion combined with cost containment measures partially offset by a reduction in consolidated net sales. Even though consolidated net sales decreased 2.4%, our 220-basis point consolidated gross margin expansion combined with the 2.7% reduction in SG&A expenses helped grow our consolidated operating income by $0.8 million and improve to 18.2% of net sales, up from 17.4% last year.

Consolidated operating income for the six months ended December 31, 2022 increased $13.1 million or 20.5% and as a percentage of net sales was 18.4%, compared to 16.3% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $74.6 million, or 17.9% of net sales compared with $60.5 million, or 15.5% of net sales in the prior year period. The increase in operating income was driven by the $27.3 million or 7.0% increase in consolidated net sales, wholesale gross margin expansion and cost containment measures that improved our operating leverage partially offset by higher selling expenses. We believe our efforts to maintain disciplined cost and expense controls, including cost containment measures and expense management helped drive our operating income growth for the first six months ended December 31, 2022. Our ability to operate the business with fewer associates has contributed to consolidated operating income and margin expansion. The majority of the headcount reductions since the end of the second quarter of fiscal 2019 were within our retail segment, which is down 41.8%.

Wholesale Operating Income

Wholesale operating income for the three months ended December 31, 2022 was $14.6 million or 13.7% of net sales, an increase compared with $9.7 million or 8.4% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $14.6 million or 13.7% of net sales compared with $6.0 million or 5.2% of net sales in the prior year quarter. The increase in wholesale operating income is due to a significant improvement in wholesale gross margin, cost containment measures within SG&A, lower distribution and inbound freight costs due to lower rates and volume, lower compensation from decreased headcount and lower professional and legal fees partially offset by higher employee benefit costs and a decline in net sales.

Wholesale operating income for the six months ended December 31, 2022 was $30.0 million or 13.6% of net sales, an increase compared with $22.6 million or 10.0% of net sales in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $30.0 million or 13.6% of net sales compared with $19.0 million or 8.4% of net sales in the prior year period. The increase is due to a significant improvement in wholesale gross margin, cost containment measures within SG&A and lower distribution and inbound freight costs due to lower rates and volume. These benefits were partially offset by lower net sales and higher employee benefit costs.

Retail Operating Income

Retail operating income for the three months ended December 31, 2022 was $18.1 million, or 10.5% of sales, compared with $22.6 million, or 12.6% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $17.9 million or 10.4% of net sales compared with $22.8 million or 12.7% of net sales in the prior year quarter. The decrease in retail operating income is attributed to the 4.4% decrease in net sales and a 100-basis point decline in retail gross margin partially offset by lower retail SG&A expenses.

Retail operating income for the six months ended December 31, 2022 was $40.1 million, or 11.3% of sales, compared with $37.0 million, or 11.1% of sales in the prior year period. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $37.9 million or 10.7% of net sales compared with $37.4 million or 11.2% of net sales in the prior year period. The increase was driven by the 6.2% increase in net sales, decreased occupancy expenses and leveraged fixed costs partially offset by a 40-basis point decline in retail gross margin, increased selling, delivery and variable compensation due to sales volume and increased advertising expenses.

Income Tax Expense

(in thousands)

Income tax expense for the three months ended December 31, 2022 was $9.8 million compared with $9.3 million in the prior year second quarter primarily due to the $1.7 million increase in income before income taxes. Our consolidated effective tax rate was 25.7% in both the current and prior year. Our effective tax rate of 25.7% varies from the 21% federal statutory rate primarily due to state taxes.

Income tax expense for the six months ended December 31, 2022 was $19.9 million compared with $16.5 million in the prior year period primarily due to the $14.4 million increase in income before income taxes. Our consolidated effective tax rate was 25.5% compared with 26.0% in the prior year comparable period. Our effective tax rate of 25.5% varies from the 21% federal statutory rate primarily due to state taxes.

Net Income

Net income for the three months ended December 31, 2022 was $28.2 million compared with $26.9 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $28.0 million, up 15.5% from the prior year period. The increase in net income and adjusted net income was due to improved gross margins and our ability to minimize SG&A expenses.

Net income for the six months ended December 31, 2022 was $58.0 million compared with $47.0 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $56.4 million, up 26.3% from the prior year period. The increase in net income and adjusted net income was due to higher net sales, improved gross margins and cost containment measures.

Diluted EPS

Diluted EPS for the three months ended December 31, 2022 was $1.10 compared with $1.05 per diluted share in the prior year period. Adjusted diluted EPS was $1.10, up 15.8% compared with the prior year period. The increase in diluted EPS and adjusted diluted EPS was driven by higher gross margins and cost containment measures partially offset by a decrease in net sales.

Diluted EPS for the six months ended December 31, 2022 was $2.27 compared with $1.85 per diluted share in the prior year period. Adjusted diluted EPS was $2.21, up 26.3% compared with the prior year period. The increase in diluted EPS and adjusted diluted EPS was driven by higher net sales, improved gross margins 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 amounts)

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

(in thousands)

(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 economic uncertainty and volatility. 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 December 31, 2022, the Company had a strong balance sheet, including available liquidity of $261.4 million as summarized below.

(in thousands)

As of December 31, 2022, we had working capital of $162.7 million compared to $131.1 million at June 30, 2022 and a current ratio of 1.93 at December 31, 2022, comparable to 1.61 at June 30, 2022 and 1.42 at December 31, 2021. Included in our cash and cash equivalents at December 31, 2022, is $7.6 million held by foreign subsidiaries, of which $7.4 million we have determined to be indefinitely reinvested.

Summary of Cash Flows

At December 31, 2022, we held cash and cash equivalents of $85.4 million compared with $109.9 million at June 30, 2022. Cash and cash equivalents aggregated to 12.0% of our total assets at December 31, 2022, compared with 15.3% of our total assets a year prior and 15.3% at June 30, 2022. In addition, we had short-term investments of $55.0 million at December 31, 2022 compared with $11.2 million at June 30, 2022. Our short-term investments at December 31, 2022 are within U.S. Treasury Bills with maturities of less than one year, and to which we expect will further enhance our returns on cash.

Our cash and cash equivalents decreased $24.5 million or 22.3% during the first six months of fiscal 2023 due to $43.4 million in net purchases of investments, $20.9 million in cash dividends paid and capital expenditures of $8.5 million, partially offset by net cash provided by operating activities of $40.9 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 six months ended December 31, 2022 and 2021 (in millions):

Cash Provided by (Used in) Operating Activities

We generated $40.9 million in cash from operating activities during the first six months of fiscal 2023, an increase from $22.7 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 our outstanding accounts receivable, which converted shipments to cash at a faster pace, and a reduction in inventory carrying levels. Restructuring payments made during the first six months of fiscal 2023 were $0.8 million compared to $0.6 million 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 $43.8 million, an increase from $4.5 million in the prior year period due to $43.4 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 fiscal 2023, we invested $49.5 million in short-term U.S. Treasury Bills, of which $25.0 million matured in November 2022 and was subsequently reinvested in additional U.S. Treasury Bills totaling $30.0 million. We also liquidated our previously held investments in municipal bonds, commercial paper and certificates of deposit during fiscal 2023, which had totaled $11.2 million as of June 30, 2022. Our short-term investments are reported within Investments in our consolidated balance sheet as of December 31, 2022 and June 30, 2022. Capital expenditures of $8.5 million during the first six months of fiscal 2023 primarily related to efficiency and safety upgrades to our manufacturing plants, 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 $21.9 million during the first six months of fiscal 2023 compared with $25.6 million in the prior year period. The decrease in cash used of $3.7 million was primarily from a lower special dividend paid, which was $0.50 in the current year compared with $0.75 a year ago. This decrease was partially offset by a 28.0% increase in the regular quarterly cash dividend payments over the prior year. The regular quarterly dividend declared by our Board on November 9, 2022 was paid on January 4, 2023, thus it was excluded from the consolidated statement of cash flows for the six months ended December 31, 2022. Similarly, the regular quarterly dividend declared by our Board on November 30, 2021 was paid on January 5, 2022, thus excluded from the consolidated statement of cash flows for the six months ended December 31, 2021.

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 December 31, 2022 and June 30, 2022, we held $0.6 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 $0.1 million during the first six 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 December 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. 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 December 31, 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 six months of fiscal 2023 totaled $8.5 million compared with $3.7 million in the prior year period. The increase is primarily related to $4.5 million of spending on our Upholstery and Case Goods manufacturing facilities to further improve their capacity, safety and efficiency. The remaining spend of $4.0 million was primarily for retail design center openings, relocations and projection changes, as well as additional investments in technology used throughout each design center. In the first six months of fiscal 2023, 53% of our total capital expenditures were for manufacturing capital projects while 47% 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 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 of 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 six 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. During the second quarter of fiscal 2023, our Board declared a regular quarterly cash dividend of $0.32 per share, payable on January 4, 2023 to shareholders of record at the close of business on December 7, 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 six months of fiscal 2023 or 2022. At December 31, 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 $15.7 million in operating lease payments made to our landlords and $15.8 million of operating lease assets obtained in exchange for $15.8 million of operating lease liabilities during the first six months of fiscal 2023, 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.

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 six 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 six 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.

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 December 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 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 December 31, 2022 was $85.4 million while our short-term investments balance was $55.0 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 December 31, 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 December 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.

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 remain volatile and, in some cases, 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 December 31, 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 December 31, 2022, the unamortized balance of such right-of-use assets totaled $103.2 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.

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 December 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 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 second quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 six months of fiscal 2023.