# Ethan Allen Interiors Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [Ethan Allen Interiors Inc](/companies/etd.md) (CIK 896156)
- Form: 10-Q
- Filed: 2023-04-26
- Accepted by EDGAR: Apr 26, 2023, 16:31 ET
- Period: 2023-03-31
- Accession: 0001437749-23-011153
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/896156/000143774923011153/eth20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/896156/000143774923011153/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $186.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-07-01 to 2023-03-31 | $604.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $74.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-07-01 to 2023-03-31 | $238.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $111.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-07-01 to 2023-03-31 | $365.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-01-01 to 2023-03-31 | $83.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-07-01 to 2023-03-31 | $262.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | $28.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-07-01 to 2023-03-31 | $105.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $7.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-07-01 to 2023-03-31 | $27.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $22.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-07-01 to 2023-03-31 | $80.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.87 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-07-01 to 2023-03-31 | $3.14 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.88 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-07-01 to 2023-03-31 | $3.16 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 25,599,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-07-01 to 2023-03-31 | 25,580,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-07-01 to 2023-03-31 | $74.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $2.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Capital expenditure | 9 months, 2022-07-01 to 2023-03-31 | $10.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-07-01 to 2023-03-31 | $37.2m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2023-03-31 | $61.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $351.9m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $741.3m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $174.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $288.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $453.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 68,231 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 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 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 March 31, 2023, the Company operated 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.

We are celebrating our 91st year in fiscal 2023 and are focused on the concept of constant reinvention. We have developed a strong network of entrepreneurial leaders and interior designers as well as strengthened our product offerings under the umbrella of classics with a modern perspective.

*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 premier 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. We seek to constantly reinvent our projection and product offerings through a broad selection of products, designed to complement one another, reflecting current fashion trends in home furnishing. 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 receive valuable input on consumer trends.

*Talent.* Our employees are dedicated to helping each customer create a place that they will love to come home to every day. We operate our business with an entrepreneurial attitude, staying focused on long-term growth, and treating our employees, vendors, and customers with dignity and respect, which we believe is critical to remaining both profitable and relevant amidst the constant changes taking place in the world. As of March 31, 2023, our employee count totaled 3,816, with 2,743 employees in our wholesale segment and 1,073 in our retail segment. We are pleased with the continued strengthening of our teams and the performance of our employee base during fiscal 2023 while at the same time being able to reduce headcount through operational efficiencies. Our employee count has decreased 10.0% since the start of fiscal 2023, with 127 fewer employees in retail and 296 fewer 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 Third Quarter in Review (1).* We maintained strong gross and operating margins despite challenging economic conditions, such as high inflation, rising interest rates, and uncertainties in the global financial markets. As we began to revert back to more normal pre-pandemic conditions when compared to the high demand and operational challenges faced during the height of the COVID-19 pandemic, our operations produced strong results. Although we cannot reasonably estimate any future economic instability on a macroeconomic scale, we remain cautiously optimistic that our current business model, strategy, and balance sheet enable us to maximize our vertically integrated structure. As a premier interior design destination with one of the world’s largest interior design networks, we remain focused on the concept of constant reinvention.

We ended the third quarter with a strong balance sheet, including cash on hand of $61.0 million and short-term investments of $95.2 million, while maintaining an operating margin above 15% through disciplined cost and expense controls. Retail written orders were down 12.3% compared with the year ago third quarter, but were 3.6% above pre-pandemic 2019 levels. Our backlog remains approximately 40% higher than our pre-pandemic levels. Consolidated gross margin of 59.9% decreased from 60.4% last year primarily due to a change in the sales mix partially offset by product pricing actions taken over the past 12 months and lower input costs from both inbound freight and materials. Our adjusted operating margin of 15.2% decreased 60 basis points from last year but remained above pre-pandemic levels. Adjusted diluted earnings per share of $0.86 was down from $0.93 a year ago. Cash generated from operations nearly doubled in the current year third quarter and totaled $33.4 million compared to $17.3 in the prior year quarter. 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 February 21, 2023, bringing the total amount of dividends paid to $37.2 million for the nine months ended March 31, 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).

|  | Three months ended March 31, 2023 | % of Sales | % Chg | 2022 | % of Sales | % Chg | Nine months ended March 31, 2023 | % of Sales | % of Chg | 2022 | % of Sales | % of Chg |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $186.3 | 100.0% | (5.7%) | $197.7 | 100.0% | 11.7% | $604.0 | 100.0% | 2.7% | $588.1 | 100.0% | 16.0% |
| Gross profit | $111.6 | 59.9% | (6.6%) | $119.5 | 60.4% | 17.8% | $365.2 | 60.5% | 4.1% | $350.9 | 59.7% | 21.6% |
| Operating income | $28.8 | 15.5% | (11.8%) | $32.7 | 16.5% | 72.0% | $105.5 | 17.5% | 9.6% | $96.3 | 16.4% | 80.9% |
| Adjusted operating income(1) | $28.3 | 15.2% | (9.5%) | $31.3 | 15.8% | 59.9% | $102.9 | 17.0% | 12.1% | $91.8 | 15.6% | 66.2% |
| Net income | $22.4 | 12.0% | (9.5%) | $24.7 | 12.5% | 58.3% | $80.4 | 13.3% | 12.0% | $71.8 | 12.2% | 71.5% |
| Adjusted net income(1) | $22.0 | 11.8% | (7.2%) | $23.7 | 12.0% | 61.5% | $78.4 | 13.0% | 14.7% | $68.4 | 11.6% | 66.3% |
| Diluted EPS | $0.87 |  | (10.3%) | $0.97 |  | 59.0% | $3.14 |  | 11.7% | $2.81 |  | 70.3% |
| Adjusted diluted EPS(1) | $0.86 |  | (7.5%) | $0.93 |  | 60.3% | $3.07 |  | 14.6% | $2.68 |  | 64.4% |
| Cash flow from operating activities | $33.4 |  | 93.2% | $17.3 |  | (52.2%) | $74.4 |  | 85.9% | $40.0 |  | (60.8%) |
| Adjusted annualized return on equity |  |  |  |  |  |  | 25.1% |  |  | 24.3% |  |  |
| Wholesale written orders |  |  | (9.3%) |  |  | (0.2%) |  |  | (10.8%) |  |  | 3.3% |
| Retail written orders |  |  | (12.3%) |  |  | (3.0%) |  |  | (12.3%) |  |  | 0.8% |

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

The following table shows our design center information.

| Retail Design Center activity: | Fiscal 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 | 2 | 2 | 4 | 5 | 1 | 6 |
| Closures | (2) | (4) | (6) | (6) | (1) | (7) |
| Transfers | - | - | - | - | - | - |
| Balance at March 31 | 155 | 139 | 294 | 160 | 141 | 301 |
| Relocations (in new and closures) | 1 | 2 | 3 | - | - | - |
| Retail Design Center geographic locations: |  |  |  |  |  |  |
| United States | 33 | 135 | 168 | 34 | 137 | 171 |
| Canada | - | 4 | 4 | - | 4 | 4 |
| China | 105 | - | 105 | 107 | - | 107 |
| Other Asia | 11 | - | 11 | 12 | - | 12 |
| Middle East and Europe | 6 | - | 6 | 7 | - | 7 |
| Total | 155 | 139 | 294 | 160 | 141 | 301 |

21

### Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three and nine months ended March 31, 2023 and 2022, 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)*

|  | Three months ended March 31, 2023 | 2022 | % Change | Nine months ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated net sales | $186,316 | $197,659 | (5.7%) | $604,007 | $588,079 | 2.7% |
| Wholesale net sales | $114,195 | $121,034 | (5.7%) | $335,093 | $346,403 | (3.3%) |
| Retail net sales | $150,923 | $166,727 | (9.5%) | $506,344 | $501,296 | 1.0% |
| Consolidated gross profit | $111,551 | $119,460 | (6.6%) | $365,187 | $350,921 | 4.1% |
| Consolidated gross margin | 59.9% | 60.4% |  | 60.5% | 59.7% |  |

#### Consolidated Net Sales

Consolidated net sales for the three months ended March 31, 2023 decreased $11.3 million or 5.7% compared to the prior year quarter primarily due to a decline of 5.7% in wholesale net shipments combined with a 9.5% reduction in retail sales through our Company-operated design centers. Sales in fiscal 2022 set a near record pace whereby each quarter consistently exceeded prior year comparable quarters leading to some of the largest historical quarterly results for net sales and result in more adverse prior year comparisons. Compared to the third quarter of fiscal 2019, which is pre-pandemic and reflective of historical norms, net sales for the three months ended March 31, 2023 were up 4.8%.

Consolidated net sales for the nine months ended March 31, 2023 increased $15.9 million or 2.7% compared to the prior year period due to retail sales growth of 1.0% partially offset by lower wholesale shipments of 3.3%. The increase in net sales reflects the realization of pricing actions taken and a favorable impact from product mix partially offset by a decline in delivered unit volume. Prior year constraints, including COVID-delays, labor disruptions, supply chain challenges, extended shipping lead times and raw material availability, have eased, which has reduced the time to convert written orders to delivered shipments. Our existing wholesale order backlog decreased 42.2% compared to the prior year. Our strategy remains focused on servicing our customers on a timely basis and reducing our existing backlog, which remains at approximately 40% higher than pre-pandemic levels.

#### Wholesale Net Sales

Wholesale net sales for the three months ended March 31, 2023 decreased $6.8 million or 5.7% 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. Reduced sales were primarily from lower incoming written orders combined with a decline in delivered volume as we continue to work down the backlog built up in prior periods. Excluding intersegment sales to our retail segment, wholesale net sales increased $4.5 million or 14.4% 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 35.9% compared to the prior year quarter due to a reduction in net sales to China and Southeast Asia. Sales to international independent retailers represented 1.8% of total wholesale net sales compared to 2.6% in the prior year period.

Wholesale net sales for the nine months ended March 31, 2023 decreased $11.3 million or 3.3% 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 $10.9 million or 12.5% compared to the prior year period from higher contract sales. Our international net sales were down 41.5% compared to the prior year period due to a reduction in net sales to China and Southeast Asia. Sales to international independent retailers represented 1.7% of total wholesale net sales compared to 2.9% in the prior year period.

Wholesale written orders, which represent orders booked through all of our channels, were down 9.3% for the three months ended March 31, 2023 compared to the prior year quarter. Written orders in fiscal 2022 set a near record pace whereby we experienced a significant surge in demand shortly after the onset of the COVID-19 pandemic, which adverse prior year comparisons. As a result of the strong and near record incoming order totals during the prior year third quarter, our independent North American retail network orders were down 12.8%, international orders were down 24.9% and orders from our Company-operated design centers were down 14.5% offset by a 50.5% increase in contract orders primarily GSA. When compared to the third quarter of fiscal 2019 (pre-pandemic levels), wholesale written orders were down 5.9%.

Wholesale written orders were down 10.8% for the nine months ended March 31, 2023 compared to the prior year period. As a result of the strong prior year comparison, orders from our Company-operated design centers were down 11.4%, our contract orders declined 2.8%, our independent North American retail network orders were down 10.8% and our international orders, including orders from China, declined 40.4%. When compared to the first nine months of fiscal 2019 (pre-pandemic levels), written orders were down 8.0%. We ended the fiscal 2023 third quarter with wholesale backlog of $73.3 million, down 42.2% from a year ago as we were able to reduce the number of weeks of wholesale backlog by 33.4% compared to the prior year, bringing our backlog more current. 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

Net sales from Company-operated design centers for the three months ended March 31, 2023 decreased $15.8 million or 9.5% compared to the prior year quarter. There was a 9.1% decrease in net sales within the United States, while net sales from our Canadian design centers decreased 21.9%. We experienced a significant surge in demand after the reopening of all our retail design centers in fiscal 2021, which led to a high backlog and higher deliveries in 2022 making it an adverse prior year comparison. Manufacturing production levels still remain above pre-pandemic levels but have slowed in the past three months as incoming written orders have slowed. In addition, retail shipments were lower year over year as our production schedules adjust to reflect decreasing weeks of backlog, especially within our Upholstery manufacturing operation. These volume decreases were partially offset by pricing actions taken in the last 12 months, an increase in average ticket price and higher premier home delivery revenue. While retail written orders decreased 12.3% year over year, they were 3.6% above the third quarter of fiscal 2019 (pre-pandemic levels). Although current written order levels are more reflective of historical norms, ongoing high inflation, concerns regarding a recession, rising interest rates, and uncertainties in the global financial markets continue to impact consumer behavior.

Retail net sales for the nine months ended March 31, 2023 increased $5.0 million or 1.0% compared to the prior year period. There was a 1.6% increase in net sales in the United States, while net sales from our Canadian design centers decreased 18.8%. The retail net sales growth of 1.0% was primarily from a high backlog that led to higher deliveries, price increases taken in the last 12 months, increased premier home delivery revenue and additional clearance sales. 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. The disruptions were temporary and the local Canadian service center resumed full operations by the second quarter of fiscal 2023. While retail written orders decreased 12.3% year over year, they were 1.3% above the first nine months of fiscal 2019 (pre-pandemic levels). We remain focused on providing exceptional personal service through our strong network of entrepreneurial leaders and interior designers as we continue to strengthen our product offerings under the umbrella of classics with a modern perspective. We have strategically relocated a number of design centers within the United States with plans for more by the end of fiscal 2023, which will further leverage our national logistics operation and vertically integrated structure. As of March 31, 2023, 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 March 31, 2023 decreased $7.9 million or 6.6% compared to the prior year quarter due to lower consolidated net sales and a reduction in consolidated and retail gross margin partially offset by an expansion in wholesale gross margin. Consolidated gross margin, as a percentage of net sales, for the three months ended March 31, 2023 was 59.9% compared with 60.4% in the prior year quarter. The third quarter of fiscal 2023 marked our eighth consecutive fiscal quarter that consolidated gross margin has been above 58%, a metric previously not seen before the onset of the COVID-19 pandemic. The consolidated gross margin decline of 50-basis points and the 5.7% decline in consolidated net sales led to gross profit decreasing by 6.6% over the prior year. The decrease in consolidated gross margin was driven by a change in the sales mix partially offset by product pricing actions taken over the past 12 months, disciplined promotional activity and lower input costs (freight and materials). Retail sales, as a percentage of total consolidated sales, were 81.0% in the current year third quarter, down from 84.4% 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. Our wholesale segment gross profit increased 2.1% in the current year third quarter, which was primarily attributable to product pricing actions taken over the past 12 months, favorable product mix, lower input costs including inflationary relief on inbound freight and raw material costs, and efficiencies gained within manufacturing production. These benefits have contributed to increased gross margin and profit in each product category within our wholesale segment. Retail gross profit decreased by 11.2% due to a 9.5% 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 additional clearance sales partially offset by incremental home delivery revenue and an increase in average ticket sale.

Consolidated gross profit for the nine months ended March 31, 2023 increased $14.3 million or 4.1% compared to the prior year period due to sales growth of 1.0% within our retail segment combined with consolidated and wholesale gross margin expansion. Consolidated gross margin was 60.5% during the first nine months of fiscal 2023 compared with 59.7% in the prior period. The 80-basis point increase was driven by product pricing actions taken over the past 12 months, disciplined promotional activity, benefits from expanded case goods manufacturing operations, a favorable product mix and lower input costs including declining inbound freight partially offset by a change in sales mix. Retail sales, as a percentage of total consolidated sales, were 83.8% in the first nine months of fiscal 2023, down from 85.2% in the prior year period. Retail gross profit decreased 0.3% due to a 70-basis point decline in gross margin partially offset by a 1.0% increase in net shipments. 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 11.4% for the first nine months of fiscal 2023 primarily due to gross margin expansion from product pricing actions taken over the past 12 months combined with declining input costs (freight and materials) partially offset by a 3.3% reduction in net sales. Higher year over year manufacturing production within case goods partially offset a decline in upholstery manufacturing. While production capacity remains strong, we have reduced our upholstery production to reflect lower weeks of backlog.

#### SG&A Expenses

*(in thousands)*

|  | Three months ended March 31, 2023 | 2022 | % Change | Nine months ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| SG&A expenses | $83,233 | $88,270 | (5.7%) | $262,342 | $259,457 | 1.1% |
| Restructuring and other impairment charges, net of gains | $(470) | $(1,463) | (67.9%) | $(2,662) | $(4,841) | (45.0%) |
| Consolidated operating income | $28,788 | $32,653 | (11.8%) | $105,507 | $96,305 | 9.6% |
| Consolidated GAAP operating margin | 15.5% | 16.5% |  | 17.5% | 16.4% |  |
| Consolidated adjusted operating margin | 15.2% | 15.8% |  | 17.0% | 15.6% |  |
| Wholesale operating income | $18,805 | $16,536 | 13.7% | $48,787 | $39,099 | 24.8% |
| Retail operating income | $12,598 | $19,330 | (34.8%) | $52,667 | $56,310 | (6.5%) |

SG&A expenses for the three months ended March 31, 2023 decreased $5.0 million or 5.7% due to lower selling expenses driven by reduced delivered volume and a reduction in general and administrative costs. Consolidated selling expenses were down 5.9% while general and administrative costs decreased 5.3%, indicative of strong cost control measures. When expressed as a percentage of net sales, SG&A expenses were 44.7% of net sales in both the current and prior year quarter as we carefully managed expenses in a declining sales environment. Total S&GA expenses of $83.2 million were our lowest level in over seven fiscal quarters, which indicates our ability to ramp down costs when net sales decline. Pre-COVID SG&A expenses averaged approximately $90 million, thus our $83.2 million in the just completed third quarter was 7.6% below the historical average.

Wholesale selling expenses, which includes logistics, were down 8.0% as distribution costs decreased from lower sales volumes, reduced headcount and declining freight rates partially offset by higher diesel fuel costs compared to a year ago, additional swatch/sample expenses and increased digital engagement, product compliance and web-enablement costs. Retail selling expenses were down 5.2% due to lower designer variable compensation and reduced headcount partially offset by higher warehouse and delivery costs from increased contract rates and fuel surcharges. Total advertising expense during the third quarter of fiscal 2023 was equal to 2.2% of net sales compared to 2.3% in the prior year third quarter. We utilize various advertising mediums including digital, direct mail, national television, and radio. Our periodic digital magazine publications are being emailed to more households than in the prior year, which we believe increases our digital marketing outreach. Consolidated general and administrative expenses decreased 5.3% primarily due to less employee compensation from reduced headcount and lower retail occupancy costs due to a smaller retail footprint partially offset by additional share-based compensation expense, unfavorable employee benefit costs including higher group insurance and an increase in professional fees.

SG&A expenses for the nine months ended March 31, 2023 increased $2.9 million or 1.1% due to higher selling expenses. Consolidated selling expenses were up 2.7% while general and administrative costs decreased 1.3%. When expressed as a percentage of net sales, SG&A expenses were 43.4% of net sales, a 70-basis point decrease compared to the prior year period due to cost containment measures on fixed costs offset by higher selling costs associated with the 2.7% increase in sales volume. Retail selling expenses increased 5.0% driven by the 1.0% increase in Retail net sales, which drove incremental delivery costs, increased contract rates and fuel surcharges and higher marketing spend partially offset by reduced designer variable compensation from lower headcount. Wholesale selling costs declined 3.6% primarily from declining freight rates and a 3.3% reduction in sales volume, which led to lower distribution and freight costs, partially offset by increased product compliance costs. For the nine months of fiscal 2023, our consolidated advertising spend was equal to 2.3% of net sales, up from 2.1% in the prior year period as we increased our direct mail campaigns focusing on being the premier interior design destination with exciting new product collections. Consolidated general and administrative expenses decreased by 1.3% for the nine months ended March 31, 2023 primarily related to cost containment and expense management efforts combined with a reduction in headcount.

#### Restructuring and Other Impairment Charges, Net of Gains

Restructuring and other impairment charges, net of gains for the three months ended March 31, 2023 was a gain of $0.5 million compared to a gain of $1.5 million in the prior year third quarter. The current year third 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 $0.2 million related primarily to severance costs. In the year ago third quarter, we sold a previously closed retail location to an independent third party for $2.6 million which resulted in a pre-tax gain of $1.5 million.

Restructuring and other impairment charges, net of gains for the nine months ended March 31, 2023 was a $2.7 million gain compared to a gain of $4.8 million in the prior year period. The recognized gain of $3.6 million from the sale-leaseback transaction was partially offset by $0.9 million in severance and other lease costs. In the first nine months of last year, we completed the sale of three properties for a combined pre-tax gain of $5.4 million, which was partially offset by severance and other lease costs.

#### Consolidated Operating Income

Consolidated operating income for the three months ended March 31, 2023 decreased $3.9 million or 11.8% and as a percentage of net sales was 15.5%, compared to 16.5% the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $28.3 million, or 15.2% of net sales compared with $31.3 million, or 15.8% of net sales in the prior year quarter. The decrease in operating income was driven by lower consolidated net sales and a gross margin reduction partially offset by strong cost containment measures. Even though consolidated net sales decreased by 5.7%, we were able to reduce SG&A expenses by 5.7%, which reflects our ability to maintain disciplined cost and expense controls in a declining sales environment, including cost containment measures and expense management. This ability helped contribute to our strong adjusted operating income above 15% in the just completed quarter.

Consolidated operating income for the nine months ended March 31, 2023 increased $9.2 million or 9.6% and as a percentage of net sales was 17.5%, compared to 16.4% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $102.9 million, or 17.0% of net sales compared with $91.8 million, or 15.6% of net sales in the prior year period. The increase in operating income was driven by the $15.9 million or 2.7% increase in consolidated net sales, wholesale gross margin expansion and cost containment measures that improved our operating leverage partially offset by higher selling expenses. Our ability to operate the business more efficiently with fewer associates has contributed to consolidated operating income and margin that are above pre-COVID-19 pandemic levels.

#### Wholesale Operating Income

Wholesale operating income for the three months ended March 31, 2023 was $18.8 million or 16.5% of net sales, an increase compared with $16.5 million or 13.7% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $19.0 million or 16.6% of net sales compared with $16.6 million or 13.8% 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 expenses, lower distribution and inbound freight costs due to lower rates and declining volume and lower compensation from decreased headcount partially offset by higher employee benefit costs and professional fees combined with a decline in net sales. The 16.5% wholesale operating income margin in the third quarter of fiscal 2023 is significantly higher than 12.0% wholesale operating income margin during the pre-COVID-19 third quarter of fiscal 2019.

Wholesale operating income for the nine months ended March 31, 2023 was $48.8 million or 14.6% of net sales, an increase compared with $39.1 million or 11.3% of net sales in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $49.0 million or 14.6% of net sales compared with $35.7 million or 10.3% of net sales in the prior year period. The increase is due to a significant improvement in wholesale gross margin, declining freight and raw material input costs, a decrease in marketing costs and lower compensation from reduced headcount partially offset by reduced fixed cost leverage from lower net sales.

#### Retail Operating Income

Retail operating income for the three months ended March 31, 2023 was $12.6 million, or 8.3% of sales, compared with $19.3 million, or 11.6% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $11.9 million or 7.9% of net sales compared with $17.9 million or 10.7% of net sales in the prior year quarter. The decrease in retail operating income is attributed to the 9.5% decrease in net sales and a 100-basis point decline in retail gross margin partially offset by lower retail SG&A expenses. Our expense base within the retail operating network has been streamlined to be more efficient, which is demonstrated by our ability to maintain strong fixed cost leverage during a declining net sales environment. While the just completed third quarter reported a decrease in operating income margin to 11.6%, this level is significantly higher than the third quarter of fiscal 2019, which reported a retail operating income margin of -1.2%.

Retail operating income for the nine months ended March 31, 2023 was $52.7 million, or 10.4% of sales, compared with $56.3 million, or 11.2% of sales in the prior year period. Adjusted retail operating income, which excludes restructuring and other charges, net of gains, was $49.9 million or 9.8% of net sales compared with $55.3 million or 11.0% of net sales in the prior year period. The decrease was driven by a 70-basis point decline in retail gross margin, increased selling and delivery costs from the 1% increase in sales volume and increased advertising expenses partially offset by increased net sales and lower occupancy expenses.

#### Income Tax Expense

*(in thousands)*

|  | Three months ended March 31, 2023 | 2022 | % Change | Nine months ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Income tax expense | $7,503 | $7,878 | (4.8%) | $27,368 | $24,389 | 12.2% |
| Effective tax rate | 25.1% | 24.2% |  | 25.4% | 25.4% |  |
| Net income | $22,356 | $24,714 | (9.5%) | $80,402 | $71,761 | 12.0% |
| Adjusted Net income | $22,005 | $23,702 | (7.2%) | $78,442 | $68,388 | 14.7% |
| Diluted EPS | $0.87 | $0.97 | (10.3%) | $3.14 | $2.81 | 11.7% |
| Adjusted Diluted EPS | $0.86 | $0.93 | (7.5%) | $3.07 | $2.68 | 14.6% |

Income tax expense for the three months ended March 31, 2023 was $7.5 million compared with $7.9 million in the prior year third quarter primarily due to the $2.7 million decrease in income before income taxes and the prior year reversal of a valuation allowance. Our consolidated effective tax rate was 25.1% in the current year compared with 24.2% in the prior year. Our effective tax rate of 25.1% varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year was primarily due to a reduction in our valuation allowance against the Retail segment’s Canadian tax assets in the prior year period.

Income tax expense for the nine months ended March 31, 2023 was $27.4 million compared with $24.4 million in the prior year period primarily due to the $11.6 million increase in income before income taxes. Our consolidated effective tax rate was 25.4% for the nine months ending March 31, 2023 and 2022. Our effective tax rate of 25.4% varies from the 21% federal statutory rate primarily due to state taxes.

#### Net Income

Net income for the three months ended March 31, 2023 was $22.4 million compared with $24.7 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $22.0 million, down 7.2% from the prior year period. The decrease in net income and adjusted net income was driven primarily by a decrease in net sales and lower gross margins partially offset by our ability to reduce SG&A expenses.

Net income for the nine months ended March 31, 2023 was $80.4 million compared with $71.8 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains, was $78.4 million, up 14.7% 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 March 31, 2023 was $0.87 compared with $0.97 per diluted share in the prior year period. Adjusted diluted EPS was $0.86, down 7.5% compared with the prior year period. The decrease in diluted EPS and adjusted diluted EPS was driven by a decrease in net sales and lower gross margins partially offset by cost containment measures.

Diluted EPS for the nine months ended March 31, 2023 was $3.14 compared with $2.81 per diluted share in the prior year period. Adjusted diluted EPS was $3.07, up 14.6% 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)

| Consolidated Adjusted Operating Income / Operating Margin | Three months ended March 31, 2023 | 2022 | % Change | Nine months ended March 31, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| GAAP Operating income | $28,788 | $32,653 | (11.8%) | $105,507 | $96,305 | 9.6% |
| Adjustments (pre-tax) \* | (470) | (1,351) |  | (2,624) | (4,503) |  |
| Adjusted operating income \* | $28,318 | $31,302 | (9.5%) | $102,883 | $91,802 | 12.1% |
| Consolidated Net sales | $186,316 | $197,659 | (5.7%) | $604,007 | $588,079 | 2.7% |
| GAAP Operating margin | 15.5% | 16.5% |  | 17.5% | 16.4% |  |
| Adjusted operating margin \* | 15.2% | 15.8% |  | 17.0% | 15.6% |  |
| Consolidated Adjusted Net Income / Adjusted Diluted EPS |  |  |  |  |  |  |
| GAAP Net income | $22,356 | $24,714 | (9.5%) | $80,402 | $71,761 | 12.0% |
| Adjustments, net of tax \* | (351) | (1,012) |  | (1,960) | (3,373) |  |
| Adjusted net income | $22,005 | $23,702 | (7.2%) | $78,442 | $68,388 | 14.7% |
| Diluted weighted average common shares | 25,599 | 25,549 |  | 25,580 | 25,504 |  |
| GAAP Diluted EPS | $0.87 | $0.97 | (10.3%) | $3.14 | $2.81 | 11.7% |
| Adjusted diluted EPS \* | $0.86 | $0.93 | (7.5%) | $3.07 | $2.68 | 14.6% |
| Wholesale Adjusted Operating Income / Adjusted Operating Margin |  |  |  |  |  |  |
| Wholesale GAAP operating income | $18,805 | $16,536 | 13.7% | $48,787 | $39,099 | 24.8% |
| Adjustments (pre-tax) \* | 194 | 107 |  | 190 | (3,449) |  |
| Adjusted wholesale operating income \* | $18,999 | $16,643 | 14.2% | $48,977 | $35,650 | 37.4% |
| Wholesale net sales | $114,195 | $121,034 | (5.7%) | $335,093 | $346,403 | (3.3%) |
| Wholesale GAAP operating margin | 16.5% | 13.7% |  | 14.6% | 11.3% |  |
| Adjusted wholesale operating margin \* | 16.6% | 13.8% |  | 14.6% | 10.3% |  |
| Retail Adjusted Operating Income / Adjusted Operating Margin |  |  |  |  |  |  |
| Retail GAAP operating income | $12,598 | $19,330 | (34.8%) | $52,667 | $56,310 | (6.5%) |
| Adjustments (pre-tax) \* | (664) | (1,458) |  | (2,814) | (1,054) |  |
| Adjusted retail operating income \* | $11,934 | $17,872 | (33.2%) | $49,853 | $55,256 | (9.8%) |
| Retail net sales | $150,923 | $166,727 | (9.5%) | $506,344 | $501,296 | 1.0% |
| Retail GAAP operating margin | 8.3% | 11.6% |  | 10.4% | 11.2% |  |
| Adjusted retail operating margin \* | 7.9% | 10.7% |  | 9.8% | 11.0% |  |

\* 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 March 31, 2023 | 2022 | Nine months ended March 31, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gain on sale-leaseback transaction (retail) | $(655) | $- | $(3,566) | $- |
| Gain on sale of property, plant and equipment (wholesale) | - | - | - | (3,913) |
| Gain on sale of property, plant and equipment (retail) | - | (1,518) | - | (1,518) |
| Severance and other charges (wholesale) | 165 | 107 | 175 | 464 |
| Severance and other charges (retail) | 20 | 60 | 767 | 464 |
| Adjustments to operating income | $(470) | $(1,351) | $(2,624) | $(4,503) |
| Adjustments to income before income taxes | $(470) | $(1,351) | $(2,624) | $(4,503) |
| Related income tax effects on non-recurring items(1) | 119 | 339 | 664 | 1,130 |
| Adjustments to net income | $(351) | $(1,012) | $(1,960) | $(3,373) |

(1) Calculated using a rate of 25.3% in current year and 25.1% in 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 March 31, 2023, the Company had available liquidity of $277.2 million as summarized below (in thousands).

|  | March 31, 2023 | June 30, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $61,031 | $109,919 |
| Short-term investments | 95,171 | 11,199 |
| Availability under existing credit facility | 120,952 | 120,952 |
| Total Available Liquidity | $277,154 | $242,070 |

As of March 31, 2023, we had working capital of $177.6 million compared to $131.1 million at June 30, 2022 and a current ratio of 2.0 at March 31, 2023, comparable to 1.6 at June 30, 2022 and 1.5 at March 31, 2022. Our foreign subsidiaries held $1.9 million in cash and cash equivalents at March 31, 2023 that we have determined to be indefinitely reinvested.

#### Summary of Cash Flows

At March 31, 2023, we held cash and cash equivalents of $61.0 million compared with $109.9 million at June 30, 2022. Cash and cash equivalents aggregated to 8.2% of our total assets at March 31, 2023, compared with 13.3% of our total assets a year prior and 15.3% at June 30, 2022. In addition to cash and cash equivalents of $61.0 million, we had short-term investments of $95.2 million at March 31, 2023 compared with $11.2 million at June 30, 2022. Our short-term investments at March 31, 2023 are within U.S. Treasury Bills with maturities of less than one year, and to which we expect will further enhance our returns on excess cash.

Our cash and cash equivalents decreased $48.9 million or 44.5% during the first nine months of fiscal 2023 due to $83.0 million in net purchases of investments, $37.2 million in cash dividends paid and capital expenditures of $10.7 million, partially offset by net cash provided by operating activities of $74.4 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 nine months ended March 31, 2023 and 2022 (in millions):

| Operating activities | Nine months ended March 31. 2023 | 2022 |
| --- | ---: | ---: |
| Net income | $80.4 | $71.8 |
| Non-cash operating lease cost | 22.6 | 22.5 |
| Restructuring and other impairment charges, net of gains | (2.7) | (4.8) |
| Restructuring payments | (1.0) | (1.1) |
| Depreciation and amortization and other non-cash items | 11.3 | 14.5 |
| Change in operating assets and liabilities | (36.2) | (62.9) |
| Total provided by operating activities | $74.4 | $40.0 |
| Investing activities |  |  |
| Capital expenditures | $(10.7) | $(9.0) |
| Proceeds from sales of property, plant and equipment | 8.1 | 10.6 |
| Purchases of investments, net of sales | (83.0) | (9.5) |
| Total used in investing activities | $(85.6) | $(7.9) |
| Financing activities |  |  |
| Dividend payments | $(37.2) | $(40.1) |
| Taxes paid related to net share settlement of equity awards | (0.8) | (0.8) |
| Proceeds from employee stock plans | 0.1 | 1.1 |
| Payments on financing leases and other | (0.4) | (1.0) |
| Total used in financing activities | $(38.3) | $(40.8) |

29

#### Cash Provided by (Used in) Operating Activities

We generated $74.4 million in cash from operating activities during the first nine months of fiscal 2023, an increase from $40.0 million in the prior year period primarily due to an improvement in working capital and higher net income. The improvement in cash provided from working capital was primarily from a reduction in inventories and accounts receivable. Our inventory decreased $24.8 million since June 30, 2022 as we seek to reduce operating inventory levels to more historical norms as our as backlog declines while also ensuring appropriate levels are maintained to service our customer base. These benefits were partially offset by a decrease in customer deposits as net shipments outpaced written orders, allowing us to work down our backlog. Restructuring payments made during the first nine months of fiscal 2023 were $1.0 million compared to $1.1 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 $85.6 million during the first nine months of fiscal 2023, an increase from $7.9 million in the prior year period due to $83.0 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 purchased $175.0 million in short-term U.S. Treasury Bills, of which $80.0 million matured during the fiscal year. During the third quarter of fiscal 2023 we increased our investment in U.S. Treasury Bills by purchasing an additional $40.0 million, bringing the total investment in U.S. Treasury Bills to $95.2 million as of March 31, 2023. We also liquidated our previously held investments in municipal bonds, commercial paper and certificates of deposit during the first quarter of 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 sheets as of March 31, 2023 and June 30, 2022. Capital expenditures of $10.7 million during the first nine 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 $38.3 million during the first nine months of fiscal 2023, a decrease from $40.8 million in the prior year period primarily from a lower special dividend paid, which was $0.50 in fiscal 2023 compared with $0.75 a year ago. This decrease was partially offset by a 15.7% increase in the total regular quarterly cash dividend paid. Regular quarterly dividends of $0.32 per share were declared by our Board on August 2, 2022, November 9, 2022, and January 24, 2023, which were subsequently paid on August 30, 2022, January 4, 2023 and February 21, 2023, respectively. In addition, a special dividend of $0.50 per share was declared by our Board on August 2, 2022 which was subsequently paid on August 30, 2022 bringing the total amount of dividends paid to $37.2 million for the nine months ended March 31, 2023.

#### 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 sheets. At March 31, 2023 and June 30, 2022, we held $0.3 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 less than $0.1 million during the first nine 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 March 31, 2023, 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 March 31, 2023 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 nine months of fiscal 2023 totaled $10.7 million compared with $9.0 million in the prior year period. The increase is primarily related to $5.3 million of spending within our Upholstery and Case Goods manufacturing facilities to further improve their capacity, safety and efficiency. The remaining spend of $5.4 million was primarily for retail design center openings, relocations and floor projection changes, as well as additional investments in technology used throughout each design center and within our corporate support services. In the first nine months of fiscal 2023, 50% of our total capital expenditures were for manufacturing capital projects while 50% 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 marginally above fiscal 2022 levels as we further invest in technology, increase manufacturing efficiency and open new or relocate design centers while also launching our next reinvention to further enhance our design center projections.

***Dividends.*** Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a strong history of returning capital to shareholders and continued this practice during the first nine months of fiscal 2023 by paying a special dividend of $0.50 per share and increasing our regular quarterly dividend by 10.3%. During the first nine months of fiscal 2023, we paid total cash dividends of $37.2 million, down from $40.1 million a year ago. During the third quarter of fiscal 2023, our Board declared a regular quarterly dividend of $0.32 per share on January 24, 2023, which was subsequently paid on February 21, 2023 to shareholders of record as of February 7, 2023. Total dividends paid in the prior year included a special cash dividend of $0.75 per share totaling $19.0 million, which was paid on August 31, 2021 compared to the fiscal 2023 special cash dividend of $0.50 per share totaling $12.7 million paid 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 nine months of fiscal 2023 or 2022. At March 31, 2023, 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 $23.4 million in operating lease payments made to our landlords and $36.4 million of operating lease assets obtained in exchange for $36.4 million of operating lease liabilities during the first nine 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 nine 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 nine 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, 8,709 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 March 31, 2023, 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 March 31, 2023 was $61.0 million while our short-term investments balance was $95.2 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 March 31, 2023. 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 March 31, 2023 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 March 31, 2023, 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 March 31, 2023, the unamortized balance of such right-of-use assets totaled $117.9 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.

#### Liquidity Risk

In response to the global bank failures in 2023 we have reinforced our commitment to maintaining a strong balance sheet and minimizing potential liquidity risk. We have taken numerous steps to ensure we partner with strong banking financial institutions to help reduce the risk of exposure to any failing institution while also allowing us to ensure the ability to access the credit markets through our existing credit agreement. In addition, as of March 31, 2023, we have not identified any major customer or supplier that had been materially impacted by the recent bank failures.

## Controls and procedures

As filed, 1,469 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 March 31, 2023, 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 third 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, 617 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 nine months of fiscal 2023.

Filed Apr 26, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-011153. Last ingested by Listed: Nov 6, 2026, 16:59 ET. No prices; not investment advice.