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

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 December 31, 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 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. 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 December 31, 2023, our employee count totaled 3,564, with 2,519 employees in our wholesale segment and 1,045 in our retail segment. Compared to a year ago, our wholesale segment headcount is down 12.0% while our retail segment is 3.2% lower. Our employee count decreased 4.9% 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 decreased 2.7% during fiscal 2024 as we continue to review existing workflows and identify opportunities to streamline.

Fiscal 2024 Second Quarter in Review (1). During fiscal 2024, we hosted grand reopening celebrations in our design centers as part of a series of events unveiling the repositioning of our retail network as an Interior Design Destination. Each ribbon-cutting offered guests a chance to peruse new products, meet each location’s interior designers and experience the newly refreshed and reimagined design center equipped with new product swatches, samples, and floor displays. In addition to hosting grand reopening events, Ethan Allen held its company-wide Virtual Convention in December 2023. The global convention celebrated over 91 years of innovation by highlighting the Company’s strategic repositioning as the Interior Design Destination across its vertically integrated enterprise, crediting its rich history in classic style with a modern perspective, the service of its vertically integrated manufacturing and logistics networks and the strengthening of the Company’s retail network.

We maintained a robust balance sheet, a strong gross margin and a double-digit operating margin. We ended the quarter with cash, cash equivalents and investments of $167.8 million and no outstanding debt. Continuing our history of returning capital to shareholders, our Board declared a regular quarterly cash dividend of $0.36 per share, which was paid on November 22, 2023. Demand during the quarter remained challenging. Retail written orders were down 9.4% compared with a year ago as a slower economy, a reduction of consumer focus on the home including a pullback on discretionary home-related spending, inflationary pressures, ongoing high interest rates and a slow housing market continue to negatively impact demand. Consolidated net sales of $167.3 million were down 17.7% primarily due to a decline in delivered volume from lower available backlog, reduced production within our Vermont manufacturing plant and slowing demand. A strong consolidated gross margin of 60.2% was due to lower raw material and freight costs offset by lower unit volume sales and a change in sales and product mix. Our adjusted operating margin of 12.8% was driven by disciplined cost control initiatives. Adjusted diluted earnings per share of $0.67 compared with $1.10 a year ago. Cash generated from operations totaled $13.6 million, significantly higher than the $2.5 million in the prior year quarter.

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

Key Operating Metrics

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

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

The following table shows our design center information.

Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three and six months ended December 31, 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 December 31, 2023 decreased $35.9 million or 17.7% compared to the prior year quarter due to a 19.0% reduction in retail sales through our Company-operated design centers and a decline of 14.7% in wholesale net shipments. Our consolidated net sales were impacted by a decline in delivered volume, continued softening of the economy, the slow recovery from flooding within our Orleans, Vermont wood furniture manufacturing plant, lower incoming written orders and reduced available backlog. Consolidated net sales in the year ago second quarter were historically high as we benefited from delivery of significant backlog driven by heightened demand in prior periods.

Consolidated net sales for the six months ended December 31, 2023 decreased $86.5 million or 20.7% compared to the prior year period primarily due to a 23.2% reduction in retail sales through our Company-operated design centers and a decline of 14.0% in wholesale net shipments. As noted earlier, our Vermont wood furniture manufacturing operations sustained damage from heavy flooding which resulted in a temporary work stoppage and lowered shipments during the first six months of fiscal 2024. We have resumed operations and are actively working to deliver previously delayed orders. Sales in the first six months of fiscal 2023 were 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 December 31, 2023 decreased $15.6 million or 14.7% compared to the prior year quarter primarily from a decline in delivered volume as a result of continued softening of the economy, the slow recovery from flooding within our Vermont plant, lower incoming written orders and reduced available backlog. We experienced decreases in intersegment sales to our Company-operated design centers, sales to our independent dealers and contract sales. Excluding intersegment sales to our retail segment, wholesale net sales decreased 10.6% compared to the prior year quarter. Our wholesale net sales outside the U.S. were up 8.3% compared to the prior year due to an increase in net sales to China and represented 2.0% of total wholesale net sales compared to 1.6% in the prior year period. Our contract sales, including shipments to the U.S. government General Services Administration (“GSA”) decreased 15.9%.

Wholesale net sales for the six months ended December 31, 2023 decreased $30.8 million or 14.0% compared to the prior year period primarily from a decline in delivered volume as a result of the flooding in Vermont during the first quarter combined with lower incoming written orders. Year-to-date decreases were noted within intersegment sales to our Company-operated design centers as well as sales to our independent dealers and contract customers. Excluding intersegment sales to our retail segment, wholesale net sales decreased 6.3% compared to the prior year. Our wholesale net sales outside the U.S. were down 4.7% compared to the prior year due to a reduction in net sales to our international retailers in Southeast Asia and the Middle East partially offset by an increase in sales to China. Our international sales represented 1.9% of total wholesale net sales compared to 1.7% in the prior year period. Our contract sales, including shipments to the GSA decreased 3.6%.

Wholesale written orders, which represent orders booked through all of our channels, were down 10.9% for the three months ended December 31, 2023 compared to the prior year quarter. Our independent U.S. retail network orders were down 12.2%, orders from our intersegment Company-operated design centers were down 12.9% and our contract orders were down 55.6% partially offset by an increase of 45.8% from our international retailers. The decline in written orders is a result of the softening in the home furnishings market, a slowing economy, inflationary pressures, ongoing high interest rates and a slow housing market.

Wholesale written orders for the six months ended December 31, 2023 were down 13.7% compared to the prior year period. Our independent U.S. retail network orders were down 9.4%, orders from our intersegment Company-operated design centers were down 14.6% and our contract orders were down 19.3% partially offset by an increase of 9.9% for our international retailers. The decline in written orders is a result of a pullback on discretionary home-related spending, a slowing economy and a difficult prior year comparison.

Wholesale backlog was $54.9 million as of December 31, 2023, down 30.1% from a year ago as we improved our delivery times during fiscal 2024. The number of weeks of wholesale backlog as of December 31, 2023 was down compared to last year with notable improvements seen within case goods and home accents as our teams are effectively managing the business to work through order backlog and to service our customers.

Retail Net Sales

Net sales from Company-operated design centers for the three months ended December 31, 2023 decreased $32.6 million or 19.0% compared to the prior year quarter. There was a 19.2% decrease in net sales within the U.S., while net sales from our Canadian design centers decreased 10.1%. The decline in retail net sales was primarily from a decline in delivered unit volume as a result of lower manufacturing levels combined with declining written orders, lower average ticket price and decreased premier home delivery revenue partially offset by higher clearance sales.

Net sales from Company-operated design centers for the six months ended December 31, 2023 decreased $82.6 million or 23.2% compared to the prior year period. There was a 23.8% decrease in net sales within the U.S., while net sales from our Canadian design centers increased 2.5%. The decline in retail net sales within the U.S. was primarily from a decline in delivered unit volume as a result of the flooding in Vermont during the first quarter, which led to lower manufacturing productions levels, combined with declining written orders, decrease in average ticket price and decreased premier home delivery revenue partially offset by higher clearance sales. Canadian retail net sales were higher as the prior year was negatively impacted by temporary disruptions at a local service center that impacted deliveries.

Retail written orders for the three months ended December 31, 2023 decreased 9.4% compared with the prior year period due to the continued softening of the economy, a pullback on discretionary home-related spending, reduced design center traffic and a slow housing market. Year-to-date fiscal 2024 retail written orders were down 11.5% year over year as weaker traffic, inflationary pressure, elevated interest rates and stock market volatility contributed to the softening of consumer interest in home furnishings.

To help drive traffic and related business to our retail design centers, we hosted grand reopening celebrations during fiscal 2024, unveiling the repositioning of our retail network as an Interior Design Destination offering guests a chance to peruse new products, meet each location’s interior designers and experience the newly refreshed and reimagined design centers. As of December 31, 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 (New York, New York) design center.

Consolidated Gross Profit and Margin

Consolidated gross profit for the three months ended December 31, 2023 decreased $23.4 million or 18.9% compared to the prior year quarter due to sales and gross margin declines within both our wholesale and retail segments, including lower delivered unit volume, and a decrease in average retail ticket price. These decreases were partially offset by lower input costs, including decreased inbound freight and raw material costs, and a change in the sales mix, with a shift to a higher percentage of wholesale product sales that carry lower margins. Wholesale gross profit decreased 17.1% primarily due to a 14.7% change in our sales, including a 15.9% decrease in contract sales, and a decrease in unit volume and manufacturing production, which led to higher unfavorable manufacturing overhead costs. These headwinds were partially offset by lower manufacturing input costs. As a result of the decline in incoming written orders and lower available backlog, we reduced our Upholstery manufacturing production levels during fiscal 2024. Retail gross profit decreased 20.0% due to the 19.0% decrease in net shipments, including lower premier home delivery revenue, combined with a decrease in average ticket sale partially offset by higher sales of designer floor samples and lower customer financing costs.

Consolidated gross profit for the six months ended December 31, 2023 decreased $52.9 million or 20.8% compared to the prior year period due to sales declines within both our wholesale and retail segments, lower delivered unit volume, a decrease in average ticket price and a lower retail gross margin. These decreases were partially offset by a change in sales mix, wholesale margin expansion and a favorable product mix. Wholesale gross profit decreased 10.7% primarily due to a 14.0% reduction in net sales partially offset by margin expansion from declining input costs. Retail gross profit decreased 23.7% primarily due to the 23.2% decrease in net shipments and lower premier home delivery revenue partially offset by increased sales of designer floor samples.

Consolidated gross margin for the three months ended December 31, 2023 was 60.2% compared to 61.0% in the prior year quarter. The 80-basis point decrease in consolidated gross margin was due to deleveraging from lower unit volume combined with a change in sales and product mix partially offset by lower manufacturing input costs and reduced headcount. Our sales mix, which represents the percentage of retail sales compared to total consolidated sales, decreased in the current year. Retail sales were 83.2% of total consolidated sales in the current year second quarter, down from 84.5% in the prior year, which negatively affected consolidated gross margin. Our wholesale segment gross margin decreased 100 basis points while our retail segment gross margin decreased 60 basis points compared to the prior year quarter. The decrease in our wholesale gross margin was driven by reduced manufacturing production, which led to higher plant manufacturing variances, combined with inflationary pressure on labor and a change in product mix partially offset by lower raw material and inbound freight costs. Retail gross margin decreased due to increased designer floor sample sales and a decrease in average ticket sale partially offset by disciplined promotional activity, including lower customer financing costs.

Consolidated gross margin for the six months ended December 31, 2023 was 60.6% comparable with 60.7% in the prior year period. Our wholesale segment gross margin increased 130 basis points while our retail segment gross margin decreased 40 basis points. Retail sales, as a percentage of total consolidated sales, were 82.4% in the current year period, down from 85.1% in the prior year, which negatively affected our consolidated gross margin. Lower manufacturing input costs helped drive an improved wholesale gross margin while increased designer floor sample sales lowered retail gross margin.

SG&A Expenses

(in thousands)

SG&A expenses for the three months ended December 31, 2023 decreased $8.0 million or 9.1% primarily due to lower selling expenses from reduced delivered unit volumes and lower marketing costs combined with a decrease in general and administrative costs. Consolidated selling expenses were down 14.1% while general and administrative costs decreased 0.9%. When expressed as a percentage of sales, SG&A expenses were 47.3% compared to 42.9% in the prior year quarter, an increase of 440 basis points driven by lower sales volume relative to fixed costs. SG&A expenses were down 9.1% while consolidated net sales decreased at the faster rate of 17.7%, which led to the decrease in our operating leverage.

Retail selling expenses were down 14.1% due to lower designer variable compensation and delivery costs from the 19.0% decrease in retail net sales and decreased advertising spend. Wholesale selling expenses, which includes our logistics operation, were down 14.3% from lower freight rates, less outgoing distribution costs driven by the 13.7% decrease in wholesale units shipped, reduced headcount and less advertising expenses partially offset by increased 3D and web-technology spend. While total advertising costs decreased 18.6% to last year, our consolidated advertising expenses during the second quarter of fiscal 2024 were equal to 2.0% of net sales, the same percentage as the year ago second quarter. Consolidated general and administrative expenses decreased 0.9% primarily due to lower employee compensation from reduced headcount and decreases in annual incentive compensation, corporate support service, group insurance and professional fees partially offset by incremental costs associated with the design center projection refreshes, higher retail occupancy expenses from the addition of two new design centers in the last twelve months and increased workers compensation expense. As part of our fiscal 2024 design center refresh initiative, we incurred incremental expenditures associated with new product swatches, samples, floor displays and maintenance including paint, lighting and flooring.

SG&A expenses for the six months ended December 31, 2023 decreased $19.6 million or 11.0% due to lower selling expenses from reduced sales. Consolidated selling expenses were down 17.6% while general and administrative costs increased 0.3%. When expressed as a percentage of sales, SG&A expenses were 48.2% compared to 42.9% in the prior year period, a decrease of 530 basis points driven by lower sales volume relative to fixed costs. SG&A expenses were down 11.0% while consolidated net sales decreased at a rate of 20.7%, which led to the decrease in our operating leverage.

Retail selling expenses were down 18.5% due to lower designer variable compensation and reduced delivery costs from the 23.2% decrease in retail net sales volume and decreased advertising spend. Wholesale selling expenses were down 15.1% from lower freight rates, a decrease in wholesale units shipped, reduced headcount and less advertising spend partially offset by an increase in technology spend. During the first half of fiscal 2024, our consolidated advertising expense was equal to 2.0% of net sales, down from 2.3% in the prior year period due to timing of direct mail and national television campaigns. Consolidated general and administrative expenses increased by 0.3% primarily due to costs associated with the design center projection refreshes and higher retail occupancy expenses from the addition of two new design centers in the last twelve months partially offset by lower employee compensation from reduced headcount, decreases in annual incentive compensation, corporate support service and professional fees, and decreased employee benefit costs, including medical and group insurance.

Compared to a year ago, our headcount is down 9.6% or 379 associates (344 wholesale and 35 retail) as we continue to identify additional operational efficiencies and leverage the use of technology to streamline workflows to help reduce our human capital costs throughout our vertically-integrated enterprise.

Restructuring and other charges, net of gains

Restructuring and other charges, net of gains was a gain of $0.2 million for both the three months ended December 31, 2023 and 2022. The current year second quarter included a gain of $0.7 million from the amortization of the deferred liability generated from the sale-leaseback transaction completed on August 1, 2022 partially offset by $0.3 million of additional repairs and maintenance costs incurred in relation to the Vermont flood and $0.2 million of severance costs. In the year ago second quarter we incurred a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction partially offset by $0.5 million of severance costs.

Restructuring and other charges, net of gains for the six months ended December 31, 2023 was a $1.3 million charge compared to a gain of $2.2 million in the prior year period. Fiscal 2024 restructuring charge of $1.3 million related primarily to the $2.3 million net loss incurred from the damage sustained in the July 2023 Vermont flooding and severance costs of $0.3 million partially offset by a $1.3 million gain related to the amortization of the above-mentioned deferred liability generated from the sale-leaseback transaction completed on August 1, 2022. Vermont flood losses incurred from the disposal of damaged inventory, inoperable machinery equipment from water damage, facility cleanup, and restoration, were $2.3 million, net of insurance recoveries and grant proceeds. In the prior year period, we recognized a gain of $2.9 million on the sale-leaseback transaction completed on August 1, 2022 partially offset by severance costs of $0.5 million.

Consolidated Operating Income

Consolidated operating income for the three months ended December 31, 2023 decreased $15.4 million or 41.5% and as a percentage of net sales was 13.0%, compared to 18.2% the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains was $21.5 million, or 12.8% of net sales compared with $36.9 million, or 18.1% of net sales in the prior year quarter. The decrease in operating income was driven by lower consolidated net sales and gross margin erosion partially offset by 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 17.7% reduction in consolidated net sales.

Consolidated operating income for the six months ended December 31, 2023 decreased $36.7 million or 47.8% and as a percentage of net sales was 12.1%, compared to 18.4% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains was $41.3 million, or 12.5% of net sales compared with $74.6 million, or 17.9% of net sales in the prior year period. The decrease in operating income was driven by lower consolidated net sales partially offset by lower operating expenses.

Wholesale Operating Income

Wholesale operating income for the three months ended December 31, 2023 was $10.8 million or 11.9% of net sales compared with $14.6 million or 13.7% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $11.1 million or 12.3% of net sales compared with $14.6 million or 13.7% of net sales in the prior year quarter. The 23.6% decrease in adjusted wholesale operating income was driven primarily by the 14.7% decline in net sales and the 100- basis point decline in gross margin partially offset by the 12.7% reduction in wholesale SG&A expenses.

Wholesale operating income for the six months ended December 31, 2023 was $25.2 million or 13.3% of net sales compared with $30.0 million or 13.6% in the prior year period. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $27.7 million or 14.6% of net sales compared with $30.0 million or 13.6% of net sales in the prior year period. The 7.7% decrease in adjusted wholesale operating income was driven primarily by the 14.0% decline in net sales partially offset by the 130-basis point improvement in wholesale gross margin and the 12.7% reduction in wholesale SG&A expenses.

Retail Operating Income

Retail operating income for the three months ended December 31, 2023 was $7.0 million, or 5.0% of sales, compared with $18.1 million, or 10.5% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $6.4 million or 4.6% of net sales compared with $17.9 million or 10.4% of net sales in the prior year quarter. The decrease in adjusted retail operating income is attributed to the 19.0% decrease in net sales and the 60-basis point reduction in gross margin partially offset by the 7.9% reduction in retail SG&A expenses.

Retail operating income for the six months ended December 31, 2023 was $12.1 million, or 4.4% of sales, compared with $40.1 million, or 11.3% of sales in the prior year period. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $10.9 million or 4.0% of net sales compared with $37.9 million or 10.7% of net sales in the prior year period. The decrease in adjusted retail operating income is attributed to the 23.2% decrease in net sales and the 40-basis point reduction in gross margin partially offset by the 10.4% reduction in retail SG&A expenses.

Income Tax Expense

(in thousands)

Income tax expense for the three months ended December 31, 2023 was $5.9 million compared with $9.8 million in the prior year second quarter primarily due to the $14.6 million decrease in income before income taxes. Our consolidated effective tax rate was 25.5% in the current year compared with 25.7% in the prior year. Our effective tax rate of 25.5% varies from the 21% federal statutory rate primarily due to state taxes.

Income tax expense for the six months ended December 31, 2023 was $11.1 million compared with $19.9 million in the prior year primarily due to the $34.5 million decrease in income before income taxes. Our consolidated effective tax rate was 25.5% in both the current year and prior year. Our effective tax rate of 25.5% varies from the 21% federal statutory rate primarily due to state taxes.

Net Income

Net income for the three months ended December 31, 2023 was $17.4 million compared with $28.2 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains was $17.2 million, down 38.5% from the prior year period. The decrease in net income and adjusted net income was driven by the $35.9 million decrease in consolidated net sales combined with gross margin erosion of 80 basis points partially offset by lower operating expenses from our ability to maintain a disciplined approach to cost savings and expense control.

Net income for the six months ended December 31, 2023 was $32.4 million compared with $58.0 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains was $33.3 million, down 41.0% from the prior year period. The decrease in net income and adjusted net income was driven by the $86.5 million reduction in consolidated net sales partially offset by lower operating expenses.

Diluted EPS

Diluted EPS for the three months ended December 31, 2023 was $0.68 compared with $1.10 per diluted share in the prior year period. Adjusted diluted EPS was $0.67, down 39.1% compared with the prior year period. The decrease in diluted EPS and adjusted diluted EPS was driven by lower consolidated net sales and gross margin erosion partially offset by lower operating expenses.

Diluted EPS for the six months ended December 31, 2023 was $1.26 compared with $2.27 per diluted share in the prior year period. Adjusted diluted EPS was $1.30, down 41.2% compared with the prior year period primarily due to lower sales.

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, 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 slowing economic period marked with high interest rates, market uncertainty and elevated inflationary pressures.

As of December 31, 2023, the Company had available liquidity of $288.7 million as summarized below (in thousands).

(1) Our long-term investments in U.S. Treasury notes are classified as non-current as they have stated maturities between one and two years.

As of December 31, 2023, we had working capital of $185.0 million compared to $196.4 million at June 30, 2023 and a current ratio of 2.3 at December 31, 2023, comparable to 2.2 at June 30, 2023 and 1.9 a year ago. Our non-U.S. subsidiaries held $3.4 million in cash and cash equivalents at December 31, 2023, which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At December 31, 2023, we held cash and cash equivalents of $55.1 million compared with $62.1 million at June 30, 2023. Cash and cash equivalents aggregated to 7.6% of our total assets at December 31, 2023 compared with 8.3% at June 30, 2023. In addition to cash and cash equivalents of $55.1 million, we had investments of $112.7 million at December 31, 2023 compared with $110.6 million at June 30, 2023. Our investments at December 31, 2023 are within U.S. Treasury bills and notes, which we expect will further enhance our returns on excess cash. Our U.S. Treasury bills totaling $97.7 million have maturities of less than one year while our U.S. Treasury notes totaling $15.1 million have maturities within one and two years.

Our cash and cash equivalents decreased $7.1 million or 11.4% during the first six months of fiscal 2024 due to $31.1 million in cash dividends paid, capital expenditures of $5.2 million and $2.1 million in taxes paid related to net share settlement of vested RSUs and PSUs partially offset by net cash provided by operating activities of $30.3 million.

The following table illustrates the main components of our cash flows for the three months ended December 31, 2023 and 2022 (in millions):

Cash Provided by Operating Activities

We generated $30.3 million in cash from operating activities during the first six months of fiscal 2024, a decrease from $40.9 million in the prior year period primarily due to lower net income partially offset by improvements in working capital. The change in working capital was primarily from a reduction in customer deposits as net shipments outpaced incoming written orders, lower inventory carrying levels as backlog declines and a decrease in outstanding accounts receivable from lower contract sales and improved cash collections. Our inventory decreased $18.9 million since June 30, 2023 as we restore our operating inventory levels to more historical levels as backlog declines. Inventory balances continue to decrease as we seek to reduce our inventory while also ensuring appropriate levels are maintained to service our customer base. Restructuring payments made during fiscal 2024 were $1.2 million compared to $0.8 million in the prior year and related primarily to the Orleans flood restoration services and severance.

Cash Used in Investing Activities

Cash used in investing activities was $4.4 million during the first six months of fiscal 2024 compared with cash used of $43.8 million in the prior year period. In the prior fiscal year, we increased our investments to enhance our returns on excess cash. The prior fiscal period included $43.4 million of net purchases of investments (net of proceeds from sales of investments). During fiscal 2024, we had $0.8 million of net proceeds from the sale of investments, which related to $40.8 million of short-term U.S. treasuries that matured during the year and the subsequent reinvestment of $40.0 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 during fiscal 2024 were $5.2 million compared with $8.5 million in the prior year period. Current year capital expenditures related primarily to design center openings and improvements, manufacturing equipment replacement within our Orleans, Vermont plant due to the flood damage caused and investments in technology upgrades. Capital expenditures a year ago were higher as we incurred additional costs related to efficiency and safety upgrades to our manufacturing plants.

Cash Used in Financing Activities

Cash used in financing activities was $33.2 million in the current year, an increase from $21.9 million in the prior year period primarily due to the timing of dividend payments. In fiscal 2024, the second regular quarterly dividend of $0.36 per share was declared by our Board of Directors in October 2023 and paid in November 2023, while in the prior year the second regular quarterly dividend payment was declared in November 2022, but not paid until January 2023. A special cash dividend of $0.50 per share was paid in both the current and prior year. There was also a 12.5% increase in the regular quarterly cash dividend to $0.36 per share, effective May 2023, and an increase in taxes paid for the net share settlement of equity awards. During 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 December 31, 2023 and June 30, 2023, we held $0.4 million and $0.5 million, respectively, 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 increased by $0.1 million during the first six months of fiscal 2024 compared with a $0.1 million decrease 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 December 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 December 31, 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 six months of fiscal 2024 totaled $5.2 million compared with $8.5 million in the prior year period. The current year capital expenditures primarily related to $3.0 million for retail design center openings and floor projection updates and $2.1 million of spending within our manufacturing facilities to further improve their efficiency and safety as well as to replace equipment damaged in the Vermont 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.

Dividends. Our Board has sole authority to determine if and when we will declare future dividends and on what terms. We have a history of returning capital to shareholders and continued this practice during fiscal 2024 by paying a special dividend of $0.50 per share in addition to our regular quarterly dividends of $0.36 per share. During the first six months of fiscal 2024, we paid total cash dividends of $31.1 million, up from $20.9 million a year ago as the regular quarterly dividend was increased by 12.5% in May 2023 and the timing of our second regular quarterly payment was in November 2023 compared to January 2023 in the prior fiscal year. 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. On October 24, 2023 our Board declared a regular quarterly dividend of $0.36 per share, which was paid on November 22, 2023 to shareholders of record as of November 7, 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 six months of fiscal 2024 or 2023. At December 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 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 $16.1 million in operating lease payments made to our landlords and $10.1 million of operating lease assets obtained in exchange for $10.1 million of operating lease liabilities during the first six 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 six 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 six 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 December 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, Cash Equivalents and Investments

The fair market value of our cash and cash equivalents at December 31, 2023 was $55.1 million while our investments balance was $112.8 million of which $97.7 is recorded as short-term and $15.1 million is recorded as long-term. 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. treasuries with maturities ranging from one year or less to within one and two years and are reported at fair value based on observable inputs. Our primary objective for holding available-for-sale securities is to achieve appropriate investment returns consistent with preserving principal and managing risk. Pursuant to our established investment policy 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 nature of our investments, our financial exposure to fluctuations in interest rates is expected to remain low. We do not believe that the value or liquidity of our cash equivalents and investments have been materially impacted by current market events. Our available-for-sale securities are held for purposes other than trading and are not leveraged as of December 31, 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 investments will continue to be immaterially affected by fluctuations in interest rates.

Foreign Currency Exchange Risk

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations. A decrease in the value of foreign currencies relative to the U.S. dollar may affect the profitability of our vendors, but as we employ a balanced sourcing strategy, we believe any impact would be moderate relative to peers in our industry.

The financial statements of our foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and liabilities and average rates for the period for revenues and expenses. Translation gains and losses that arise from translating assets, liabilities, revenues and expenses of foreign operations are recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the value of foreign currencies did not have a material impact during any of the fiscal periods presented in this Annual Report on Form 10-K.

A hypothetical 10% weaker United States dollar against all foreign currencies at December 31, 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. We believe any material inflationary impact on our product and operating costs would be partially offset by our ability to increase selling prices, create operational efficiencies and seek lower cost alternatives. During fiscal 2024, a period marked by ongoing high inflation, we have been able to reduce certain manufacturing input costs by identifying lower cost alternatives in raw materials as well as implemented operational efficiencies, including reduced headcount, which have helped to minimize the impact of high inflation.

Commercial Real Estate Market Risk

We have potential exposure to market risk related to conditions in the commercial real estate market. As of December 31, 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 December 31, 2023, the unamortized balance of such right-of-use assets totaled $113.7 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, including our Chairman of the Board, President and Chief Executive Officer (“CEO”) and Senior Vice President, Chief Financial Officer and Treasurer (“CFO”), has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our CEO and CFO have concluded that, as of December 31, 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 second quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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