Ethan Allen Interiors Inc: Form 10-Q for the period ended Sep 30, 2023

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 2023 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

17

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the MD&A, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Generally, forward-looking statements represent management’s beliefs and assumptions concerning current expectations, projections or trends relating to results of operations, financial results, financial condition, strategic objectives and plans, expenses, dividends, share repurchases, liquidity, use of cash and cash requirements, borrowing capacity, investments, future economic performance, and our business and industry. 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,” 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: 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; 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; 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 failure 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 U.S. 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; risks associated with self-insurance related to health benefits; adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty; 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 2023 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 are known for the quality and craftsmanship of our products as well as for the exceptional personal service from design to delivery. We provide complimentary interior design service to our clients and sell a full range of home furnishings through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com.

Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of September 30, 2023, the Company operates 141 retail design centers; 137 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.

Ethan Allen was named to Newsweek’s list of America’s Best Retailers, including the #1 retailer of Premium Furniture, during the first quarter of fiscal 2024. This award is presented by Newsweek and Statista Inc., a leading statistics portal and industry ranking provider. The final assessment and rankings were the result of an independent survey of more than 9,000 customers who have shopped at retail stores in person in the past three years and based on the likelihood of recommendation and the evaluation of products, customer service, atmosphere, accessibility and store layout.

Business Model. We are an Interior Design Destination. We are celebrating our 91st year and remain focused on the concept of constant reinvention. Our business model is to maintain 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) being socially responsible. 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 under the umbrella of Classics with a Modern Perspective. Our vertical integration is a competitive advantage for us. Our North American manufacturing and logistics operations are an integral part of an overall strategy to maximize production efficiencies and maintain this competitive advantage.

Talent. As of September 30, 2023, our employee count totaled 3,659, with 2,584 employees in our wholesale segment and 1,075 in our retail segment. Our employee count has decreased 2.4% during fiscal 2024, reflective of manufacturing efficiencies gained through the use of technology combined with reduced production from lower backlog and a decline in incoming written orders. Our retail segment headcount has remained flat during fiscal 2024. Compared to a year ago, our wholesale segment headcount is down 13.1% while our retail segment is 10.0% lower.

Fiscal 2024 First Quarter in Review (1). We continued to maintain a strong balance sheet, a high gross margin and a strong double-digit operating margin, as we believe we are well-positioned to support our future growth initiatives. We ended the quarter with cash, cash equivalents and investments of $163.2 million and no outstanding debt. Continuing our strong history of returning capital to shareholders, our Board declared and paid both a regular quarterly cash dividend of $0.36 per share as well as a special dividend of $0.50 per share in August 2023. Retail written orders were down 13.2% compared with the year ago first quarter as inflationary pressures, high interest rates and a pull back on discretionary home-related spending, negatively impacted demand. Consolidated net sales of $163.9 million were down 23.6% primarily due to manufacturing delays caused by the recent Vermont flood, which reduced net sales by approximately $15 million. Consolidated gross margin improved to 61.1% primarily due to a change in the product mix, lower input costs and operational efficiencies gained through the use of technology partially offset by lower unit volume sales and a change in the sales mix. Our adjusted operating margin of 12.1% decreased 550 basis points from last year driven by the decline in sales. Adjusted diluted earnings per share of $0.63 compared with $1.11 a year ago. Cash generated from operations totaled $16.7 million compared with $38.4 million in the prior year quarter.

In July 2023, our wood furniture manufacturing operations located in Orleans, Vermont sustained damage from heavy flooding. In addition to losses related to wood furniture inventory parts and state-of-the-art manufacturing equipment, the flooding also resulted in a temporary work stoppage for many Vermont associates and a disruption and delay of shipments for approximately seven weeks. The delay in the production of custom orders reduced our consolidated net sales by approximately $15 million for the first quarter and increased our case goods backlog by 3 weeks. Losses incurred from the flood totaled $2.1 million, net of insurance recoveries and grant proceeds.

While we understand the challenges of a slower economy and the reduction of consumer focus on the home, we remain cautiously optimistic that our current business model, strategy, and balance sheet will enable us to fulfill our many initiatives over the remainder of the fiscal year.

(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.

20

Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three months ended September 30, 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)

Consolidated Net Sales

Consolidated net sales for the three months ended September 30, 2023 decreased $50.6 million or 23.6% compared to the prior year quarter primarily due to a 27.3% reduction in retail sales through our Company-operated design centers and a decline of 13.3% in wholesale net shipments. In July 2023, our Orleans, Vermont wood furniture manufacturing operations sustained damage from heavy flooding which resulted in a temporary work stoppage and lowered shipments by approximately $15 million during the first quarter. Our Orleans plant has since resumed operations and we expect to recover from the delayed shipments during the second and third quarters of fiscal 2024. Sales in the first quarter a year ago were also historically high as we increased our manufacturing production to bring our significant backlog more current.

Wholesale Net Sales

Wholesale net sales for the three months ended September 30, 2023 decreased $15.2 million or 13.3% compared to the prior year quarter due to a decrease in intersegment sales to our Company-operated design centers and sales to our independent dealers partially offset by higher contract sales. Reduced sales were primarily from a decline in delivered volume as a result of the flooding in Vermont combined with lower incoming written orders. Excluding intersegment sales to our retail segment, wholesale net sales decreased 1.9% compared to the prior year quarter. Our wholesale net sales outside the U.S. were down 15.0% compared to the prior year due to a reduction in net sales to China and our international retailers in Southeast Asia. Sales to our international independent retailers represented 1.8% of total wholesale net sales compared to 1.9% in the prior year period. Our contract sales, including shipments to the United States government General Services Administration (“GSA”) increased 9.3%.

Wholesale written orders, which represent orders booked through all of our channels, were down 15.6% for the three months ended September 30, 2023 compared to the prior year quarter. Our independent U.S. retail network orders were down 7.2%, international retailer orders were down 20.7%, orders from our intersegment Company-operated design centers were down 16.0% and our contract orders (primarily GSA) were down 17.9%. The decline in written orders is a result of the overall market downturn in home furnishings from challenging factors, such as inflationary pressures, high interest rates, global unrest and a change in the allocation of discretionary spending. Wholesale backlog was $75.4 million as of September 30, 2023, down 28.6% from a year ago but up $1.4 million from June 30, 2023 due to the timing of incoming GSA written orders combined with production levels being negatively impacted by the Vermont flood which increased our case goods backlog by approximately 3 weeks. The number of weeks of wholesale backlog as of September 30, 2023 was down compared to last year, with notable improvements seen within upholstery and home accents, partially offset by the aforementioned higher case goods backlog. In the near-term, our teams are managing the business to work through the higher order backlog and remain focused on production and shipping.

Retail Net Sales

Net sales from Company-operated design centers for the three months ended September 30, 2023 decreased $50.1 million or 27.3% compared to the prior year quarter. There was a 28.1% decrease in net sales within the U.S., while net sales from our Canadian design centers increased 19.6%. The decline in retail net sales was primarily from a decline in delivered unit volume as a result of the flooding in Vermont, which led to lower manufacturing productions levels, combined with declining written orders and decreased premier home delivery revenue partially offset by higher clearance sales. Canadian retail net sales were higher driven by an increase in average ticket price combined with the prior year first quarter being negatively impacted by temporary disruptions at a local service center that impacted deliveries. Retail written orders decreased 13.2% year over year as inflationary pressures, higher interest rates and global unrest have contributed to the softening of consumer interest in home furnishings and is reflected in a decrease in quarterly traffic compared to the prior year.

We are proud to celebrate our culture of constant reinvention and excited to start the next phase of our journey. We are repositioning our retail network as an Interior Design Destination and are nearing completion of this design center refresh project. As part of this refresh initiative, we incurred incremental expenditures associated with new product swatches, samples, floor displays and maintenance including paint, lighting and flooring. In the upcoming months we will be hosting design center grand reopenings, which offer guests a chance to see our new products and meet our local designers. As of September 30, 2023, there were 141 Company-operated design centers compared to 139 in the prior year, with new locations in The Villages, Florida and Avon, Ohio and a relocation of our Manhattan design center.

Consolidated Gross Profit and Margin

Consolidated gross profit for the three months ended September 30, 2023 decreased $29.5 million or 22.7% compared to the prior year first quarter due to sales declines within both our wholesale and retail segments, a change in the sales mix with a shift to more wholesale sales which carries lower margins, and lower delivered unit volume. These decreases were partially offset by wholesale margin expansion from lower input costs including declining inbound freight, disciplined promotional activity, a higher percentage of contract sales, a favorable product mix and an increase in average ticket price. Wholesale gross profit decreased 4.6% primarily due to a 13.3% reduction in net sales gross partially offset by margin expansion from declining input costs (inbound freight and materials). As a result of the decline in incoming written orders and lower weeks of backlog, we have reduced our Upholstery production levels. Retail gross profit decreased 27.2% primarily due to the 27.3% decrease in net shipments, increased designer floor sample sales, lower premier home delivery revenue and increased fees to offer our customers interest free financing partially offset by an increase in average ticket sale.

Consolidated gross margin was 61.1% compared with 60.4% in the prior year quarter due to a change in product mix and lower manufacturing input costs partially offset by a change in sales mix. The just completed first quarter of fiscal 2024 was our 10th consecutive quarter that consolidated gross margin exceeded 58%. Our wholesale segment gross margin increased 330 basis points while our retail segment gross margin was flat to last year. Retail sales, as a percentage of total consolidated sales, were 81.5% in the current year first quarter, down from 85.6% in the prior year.

SG&A Expenses

(in thousands)

SG&A expenses for the three months ended September 30, 2023 decreased $11.7 million or 12.7% due to lower selling expenses from reduced delivered unit volumes partially offset by an increase in general and administrative costs. Consolidated selling expenses were down 20.9% while general and administrative costs increased 1.4%. When expressed as a percentage of sales, SG&A expenses were 49.0% compared to 42.9% in the prior year quarter, an increase of 610 basis points primarily driven by lower sales volume relative to fixed costs. SG&A expenses were down 12.7% while consolidated net sales decreased at a much faster rate of 23.6%, which led to the decrease in operating leverage.

Retail selling expenses were down 22.5% due to lower designer variable compensation, reduced delivery costs from the 27.3% decrease in retail net sales volume and decreased advertising spend. Wholesale selling expenses, which includes our logistics operation, were down 15.8% from lower freight rates and less outgoing distribution costs driven by an 8.0% decrease in wholesale units shipped, reduced headcount and less advertising spend partially offset by an increase in web-enablement and 3D technology spend. Our consolidated advertising expenses during the first quarter of fiscal 2024 was equal to 2.0% of net sales, down from 2.5% in the prior year first quarter due to timing of direct mail campaigns. Consolidated general and administrative expenses increased 1.4% primarily due to incremental costs associated with the design center projection refreshes combined with increased employee benefit costs, including medical and group insurance, partially offset by lower employee compensation from reduced headcount and decreases in annual incentive compensation, corporate technology support services and professional fees.

Restructuring and other charges, net of gains

Restructuring and other charges, net of gains for the three months ended September 30, 2023 were $1.5 million compared to a gain of $2.0 million in the prior year first quarter primarily from the net loss on the Vermont flood of $2.1 million partially offset by a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction completed on August 1, 2022. In July 2023, our wood furniture manufacturing operations located in Orleans, VT sustained damage from heavy flooding of the nearby Barton River. Losses incurred from the disposal of damaged inventory, inoperable machinery equipment from water damage, facility cleanup, and restoration, was $2.1 million, net of insurance recoveries and grant proceeds. In the year ago first quarter we completed a sale-leaseback transaction with an independent third party for the land, building and related fixed assets of a retail design center on August 1, 2022. The design center was leased back to Ethan Allen via a multi-year operating lease agreement. As part of the transaction, we received gross proceeds of $8.4 million, less closing costs of $0.3 million, and recognized a gain of $2.3 million in the first quarter of fiscal 2023.

Consolidated Operating Income

Consolidated operating income for the three months ended September 30, 2023 decreased $21.3 million or 53.7% and as a percentage of net sales was 11.2%, compared to 18.5% the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains was $19.8 million, or 12.1% of net sales compared with $37.7 million, or 17.6% of net sales in the prior year quarter. The decrease in operating income was driven by lower consolidated net sales partially offset by gross margin expansion and lower operating expenses. We remain focused on a disciplined approach to cost savings and expense control in a declining net sales environment, which helped mitigate the impact of the 23.6% reduction in consolidated net sales. Compared to a year ago, our headcount is down 509 associates (390 wholesale and 119 retail) or 12.2% as we continue to identify additional operational efficiencies and leverage the use of technology to streamline workflows. Our ability to operate the business more efficiently with less headcount has helped our operating margin.

Wholesale Operating Income

Wholesale operating income for the three months ended September 30, 2023 was $14.4 million or 14.5% of net sales compared with $15.4 million or 13.4% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $16.5 million or 16.6% of net sales compared with $15.4 million or 13.4% of net sales in the prior year quarter. The 7.2% increase in adjusted wholesale operating income was driven by an improvement in wholesale gross margin, lower distribution and inbound freight costs due to declining volumes, lower compensation from less headcount and reduced incentives, decreased professional fees and less advertising spend partially offset by the 13.3% decline in net sales and higher employee benefit costs.

Retail Operating Income

Retail operating income for the three months ended September 30, 2023 was $5.2 million, or 3.9% of sales, compared with $22.0 million, or 12.0% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $4.5 million or 3.4% of net sales compared with $20.0 million or 10.9% of net sales in the prior year quarter. The decrease in adjusted retail operating income is attributed to the 27.3% decrease in net sales, incremental expenditures associated with new product swatches, samples, floor displays and projection refresh, fixed warehouse costs and increased employee benefit costs partially offset by lower designer variable compensation and delivery costs from the decreased sales volume, lower compensation from less headcount and reduced advertising spend.

Income Tax Expense

(in thousands)

23

Income tax expense for the three months ended September 30, 2023 was $5.1 million compared with $10.1 million in the prior year first quarter primarily due to the $19.9 million decrease in income before income taxes. Our consolidated effective tax rate was 25.6% in the current year compared with 25.3% in the prior year. Our effective tax rate of 25.6% 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 unrecognized tax benefits.

Net Income

Net income for the three months ended September 30, 2023 was $14.9 million compared with $29.9 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains was $16.1 million, down 43.5% from the prior year period. The decrease in net income and adjusted net income was driven by lower consolidated net sales partially offset by gross margin expansion and lower operating expenses.

Diluted EPS

Diluted EPS for the three months ended September 30, 2023 was $0.58 compared with $1.17 per diluted share in the prior year period. Adjusted diluted EPS was $0.63, down 43.2% compared with the prior year period. The decrease in diluted EPS and adjusted diluted EPS was driven by lower consolidated net sales partially offset by gross margin expansion and lower operating expenses.

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 rate of 25.3% in both current and prior year.

Liquidity

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

As of September 30, 2023, the Company had available liquidity of $284.1 million as summarized below (in thousands).

As of September 30, 2023, we had working capital of $187.9 million compared to $196.4 million at June 30, 2023 and a current ratio of 2.1 at September 30, 2023, comparable to 2.2 at June 30, 2023 and 1.7 at September 30, 2022. Our non-U.S. subsidiaries held $2.9 million in cash and cash equivalents at September 30, 2023, which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At September 30, 2023, we held cash and cash equivalents of $56.9 million compared with $62.1 million at June 30, 2023. Cash and cash equivalents aggregated to 7.7% of our total assets at September 30, 2023 compared with 8.3% at June 30, 2023. In addition to cash and cash equivalents of $56.9 million, we had short-term investments of $106.3 million at September 30, 2023 compared with $110.6 million at June 30, 2023. Our short-term investments at September 30, 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 $5.2 million or 8.4% during the first three months of fiscal 2024 due to $21.9 million in cash dividends paid, capital expenditures of $3.7 million and $2.1 million in taxes paid related to net share settlement of vested RSUs and PSUs. These cash outflows were partially offset by net cash provided by operating activities of $16.7 million and $5.7 million in net proceeds from sales of investments.

The following table illustrates the main components of our cash flows for the three months ended September 30, 2023 and 2022 (in millions):

26

Cash Provided by (Used in) Operating Activities

We generated $16.7 million in cash from operating activities during the first three months of fiscal 2024, a decrease from $38.4 million in the prior year period primarily due to lower net income and changes in working capital. An increase in prepaid expenses related to the timing of insurance renewals combined with annual incentive compensation payments led to the change in working capital. The year ago first quarter benefited from a reduction in inventory carrying levels. Our inventory balance was $149.6 million as of September 30, 2023, an increase of $0.4 million since June 30, 2023, but lower than $167.7 million a year ago as we restore our operating inventory levels to more historical levels as backlog declines.

Cash Provided by (Used in) Investing Activities

Cash provided by investing activities was $2.0 million during the first three months of fiscal 2024, an increase from cash used of $33.5 million in the prior year period. In the prior fiscal year, we increased our short-term investments to enhance our returns on excess cash. The prior fiscal quarter included $38.4 million of net purchases of investments (net of proceeds from sales of investments). During fiscal 2024, we had $5.7 million of net proceeds from the sale of investments which was the redemption of $30.7 million of short-term U.S. Treasury Bills that matured during the quarter and was subsequently reinvested at $25.0 million. In addition, the prior year quarter included $8.1 million in proceeds received from the sale-leaseback transaction completed in August 2022. Capital expenditures increased to $3.7 million compared to $3.2 million in the prior year quarter primarily related to design center openings, relocations and improvements, efficiency and safety upgrades to our manufacturing plants, equipment replacement within our Orleans, Vermont plant due to the flood damage caused and investments in technology upgrades.

Cash Provided by (Used in) Financing Activities

Cash used in financing activities was $23.8 million in the current year, an increase from $21.8 million in the prior year period primarily from a 12.5% increase in the regular quarterly cash dividend to $0.36 per share and an increase in taxes paid for the net share settlement of equity awards. There was a special cash dividend of $0.50 per share paid in both the current and prior year. Regular quarterly dividends of $0.36 per share as well as the special cash dividend of $0.50 per share were declared by our Board on August 1, 2023, which were subsequently paid on August 31, 2023 bringing the total amount of dividends paid to $21.9 million for the three months ended September 30, 2023. During the first quarter of fiscal 2024, a total of 66,328 shares valued at $2.1 million were repurchased from employees to satisfy their withholding tax obligations upon vesting of RSUs and PSUs. There were no repurchases of common stock under our existing share repurchase program during fiscal 2024 or 2023.

Restricted Cash

We present restricted cash as a component of total cash and cash equivalents on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheets. At both September 30, 2023 and June 30, 2023, we held $0.5 million of restricted cash related to our Ethan Allen insurance captive.

Exchange Rate Changes

Due to changes in exchange rates, our cash and cash equivalents were reduced by $0.1 million during the first three months of fiscal 2024 compared with a $0.3 million negative impact in the prior year period. These changes had an immaterial impact on our cash balances held in Canada, Mexico, and Honduras.

Capital Resources, including Material Cash Requirements

Sources of Liquidity

Capital Needs. On January 26, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides us with an option to increase the size of the Facility up to an additional amount of $60 million. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. The Facility includes covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As of September 30, 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 September 30, 2023 and June 30, 2023, there was $4.0 million of standby letters of credit outstanding under the Facility.

Uses of Liquidity

Capital Expenditures. Capital expenditures during the first three months of fiscal 2024 totaled $3.7 million compared with $3.2 million in the prior year period. The current expenditures this year is primarily related to $2.2 million for retail design center openings, relocations and floor projection refreshes and $1.3 million of spending within our manufacturing facilities to further improve their efficiency and safety as well as to replace equipment damaged in the flood.

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 2024 capital expenditures to be slightly above fiscal 2023 levels as we 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 three months of fiscal 2024 by paying a special dividend of $0.50 per share in addition to our regular quarterly dividend of $0.36 per share. During the first three months of fiscal 2024, we paid total cash dividends of $21.9 million, up from $20.9 million a year ago as the regular quarter dividend was increased by 12.5% in May 2023. On August 1, 2023, our Board declared a regular quarterly dividend of $0.36 per share as well as a special dividend of $0.50 per share, which was paid on August 31, 2023 to shareholders of record as of August 15, 2023.

We have paid a special cash dividend each of the past three years and paid an annual cash dividend every year since 1996. Although we expect to continue to declare and pay comparable quarterly cash dividends for the foreseeable future, the payment of future cash dividends is within the discretion of our Board of Directors and will depend on our earnings, operations, financial condition, capital requirements and general business outlook, among other factors. Our credit agreement also includes covenants that includes limitations on our ability to pay dividends.

Share Repurchase Program. There were no share repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during the first three months of fiscal 2024 or 2023. At September 30, 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 2023 Annual Report on Form 10-K, as of June 30, 2023, we had total contractual obligations of $199.1 million, including $152.4 million related to operating lease commitments and $29.2 million of open purchase orders. Except for $8.2 million in operating lease payments made to our landlords and $7.7 million of operating lease assets obtained in exchange for $7.7 million of operating lease liabilities during the first three months of fiscal 2024, there were no other material changes in our contractual obligations as previously disclosed in our 2023 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 retained or contingent interests, derivative instruments or variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.

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 2023 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first three months of fiscal 2024 from those disclosed in our 2023 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 2023 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first three months of fiscal 2024 from those disclosed in our 2023 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 the following market risks, which could impact our financial position and results of operations.

Interest Rate Risk

Debt

Interest rate risk exists primarily through our borrowing activities. Short-term debt, if required, is used to meet working capital requirements and long-term debt, if required, is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements. While we had no fixed or variable rate borrowings outstanding at September 30, 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, Cash Equivalents and Investments

The fair market value of our cash and cash equivalents at September 30, 2023 was $56.9 million while our short-term investments balance was $106.3 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. Our investments consist of U.S. Treasury Bills with maturities of one year or less and at fair value based on observable inputs. Our primary objective for holding available-for-sale securities is to achieve an appropriate investment return consistent with preserving principal and managing risk. Pursuant to our established investment guidelines, we try to achieve high levels of credit quality, liquidity and diversification. At any time, a sharp rise in market interest rates could have an impact on the fair value of our available-for-sale securities portfolio. Conversely, declines in interest rates, including the impact from lower credit spreads, could have an adverse impact on interest income for our investment portfolio. However, because of our investment policy and the short-term nature of our investments, our financial exposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash equivalents and investments have been materially impacted by current market events. Our available-for-sale securities are held for purposes other than trading and are not leveraged as of September 30, 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 September 30, 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 September 30, 2023, there were 141 Company-operated retail design centers, of which 49 are owned and 92 are leased. Our retail segment real estate holdings could suffer significant impairment in value if we are forced to close design centers and sell or lease the related properties during periods of weakness in certain markets. We are also exposed to risk related to conditions in the commercial real estate rental market with respect to the right-of-use assets we carry on our balance sheet for leased design center locations and warehouse and distribution facilities. At September 30, 2023, the unamortized balance of such right-of-use assets totaled $117.3 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 September 30, 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 first quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We described in our 2023 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 2023 Annual Report on Form 10-K. There have been no material changes to our risk factors during the first three months of fiscal 2024.