Ethan Allen Interiors Inc: Form 10-Q for the period ended Sep 30, 2024

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 is based upon, and should be read in conjunction with, our 2024 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
• Regulation G Reconciliations 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 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; 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 2024 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. 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 clients 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 U.S. and internationally as well as online at ethanallen.com.

Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. At September 30, 2024, the Company operates 142 retail design centers, 138 located in the U.S. and 4 in Canada. Our independently operated design centers are located in the U.S., Asia, the Middle East and Europe. We manufacture approximately 75% of our furniture in our North American manufacturing plants and have been recognized for product quality and craftsmanship since we were founded in 1932. At September 30, 2024, we own and operate eleven manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and a kiln dry lumberyard in the United States, three upholstery plants in Mexico and one case goods plant in Honduras. We also partner with suppliers located in the U.S., Europe and Asia to produce and import various products that support our business.

Business Model. 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. We strive to deliver value to our shareholders through the execution of our strategic initiatives focused on the concept of constant reinvention. Ethan Allen has a distinct vision of classic American style with a modern perspective, which we believe differentiates us from our competitors. Our business model is to maintain continued focus on (i) providing relevant product offerings, (ii) capitalizing on the professional and personal service offered to our clients 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 all aspects of our vertically integrated business, (v) maintaining a strong logistics network, (vi) communicating our messages with strong marketing campaigns, and (vii) utilizing our website, ethanallen.com, as a key marketing tool to drive traffic to our retail design centers. We aim to position Ethan Allen as a premier interior design destination and a preferred brand offering products of superior style, quality, and value to clients with a comprehensive solution for their home furnishing and interior design needs. We operate our business with an entrepreneurial attitude and treat our employees, vendors, and clients with dignity and respect.

Talent. At September 30, 2024, our employee count totaled 3,347, with 2,347 employees in our wholesale segment and 1,000 in our retail segment. We continue to invest in technology, which has helped us further streamline and automate processes. By leveraging technology and identifying workflow efficiencies, we have reduced our headcount by 8.5% in the last 12 months.

Fiscal 2025 First Quarter in Review (1). Our financial results for the first quarter were highlighted by strong margins and operating cash flow. In addition, for the second year in a row, Ethan Allen was named to Newsweek’s list of America’s Best Retailers, including the #1 retailer of Premium Furniture. We ended the quarter with cash, cash equivalents and investments of $186.4 million and no outstanding debt. Continuing our history of returning capital to shareholders, we paid a special dividend of $0.40 per share in addition to the regular quarterly cash dividend of $0.39 per share. Our vertically integrated business delivered consolidated net sales of $154.3 million, which were down 5.8% compared with a year ago due to a decline in delivered unit volume from lower available backlog and reduced production from slowing demand, lower design center traffic and fewer contract sales. Industry-wide soft demand for home furnishings and challenging economic headwinds remained throughout the quarter, which led to retail written orders being down 6.8% and wholesale written orders down 4.8%. We maintained a strong consolidated gross margin of 60.8% due to lower manufacturing raw material input costs, reduced headcount, a change in the sales mix and selective price increases. Our double-digit operating margin of 11.4% was driven by disciplined cost control, reduced headcount leveraging technology to streamline workflows. Diluted EPS was $0.57 compared with $0.58 a year ago. We ended the quarter with 188 Ethan Allen retail design centers, including 142 Company-operated and 46 independently owned and operated locations.

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

Design center activity and geographic distribution of our retail network are as follows:

Results of Operations

For an understanding of the significant factors that influenced our financial performance during the three months ended September 30, 2024 and 2023, 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)

20

Net Sales

Consolidated net sales for the three months ended September 30, 2024 decreased $9.6 million or 5.8% compared with the prior year quarter due to lower contract sales, a decline in delivered unit volume from lower available backlog, reduced production from slowing demand, lower design center traffic and the adverse impact from Hurricane Helene and the U.S. port strike.

Wholesale net sales for the three months ended September 30, 2024 decreased $13.4 million or 13.5% compared to the prior year quarter due to lower contract sales and intersegment sales to our Company-operated design centers. Excluding intersegment sales to our retail segment, wholesale net sales decreased 28.7% compared to the prior year quarter primarily from a 54.3% decrease in contract sales, including lower shipments to the U.S. government General Services Administration (“GSA”). The combination of a slowdown in U.S. government spending, ongoing global unrest and the upcoming national election, resulted in lower incoming GSA orders over the past 12 months, which led to lower available backlog and fewer contract sales. In addition, the impact of Hurricane Helene in late September 2024 resulted in a temporary disruption and delay in shipments. Our western North Carolina distribution center, which was impacted by Hurricane Helene, has since resumed operations and we expect to recover from the delay in shipments during the second quarter of fiscal 2025. Lastly, the longshoremen’s strike against the U.S. East and Gulf Coast ports, which lasted from October 1, 2024 until October 3, 2024, negatively impacted imports and our ability to receive and ship products near the end of the first quarter due to heightened congestion and delayed bookings.

Wholesale written orders, which represent orders booked through all of our channels, were down 4.8% for the three months ended September 30, 2024 compared to the prior year quarter. The decline in wholesale written orders is a result of a sluggish home furnishings market, an economy marked with ongoing inflationary pressures including elevated interest rates over historic norms, a slow housing market that has not yet rebounded and a slower contract business. Orders from our independent U.S. retail network decreased 13.8% while orders from our intersegment Company-operated design centers were down 3.6% and our contract orders were down 6.0%. These decreases were partially offset by a 17.3% increase in orders from our international retailers, mostly from China. International sales represented 1.7% of total wholesale net sales during the first quarter of fiscal 2025, which is comparable to 1.8% in the year ago first quarter.

Wholesale backlog was $63.9 million at September 30, 2024, down 15.2% from a year ago, but up $10.4 million from June 30, 2024 due to the timing of incoming GSA written orders. The number of weeks of wholesale backlog at September 30, 2024 was comparable to last year. Moving forward, we expect incoming order trends to approximate outgoing delivered sales as backlog levels are now more reflective of pre-pandemic levels.

Retail net sales decreased $0.8 million or 0.6% compared to the prior year quarter. The decline was driven by lower delivered unit volumes, less incoming written orders, lower available backlog, decreased premier home delivery revenue and lower designer floor sample sales partially offset by lower sales returns and a higher average ticket price.

Retail written orders for the three months ended September 30, 2024 decreased 6.8% year over year due to weaker design center traffic, a soft home furnishings industry, elevated interest rates over historic norms, a slow housing market and adverse weather that negatively impacted much of the southeast U.S. These decreases were partially offset by a higher average ticket price, the adoption of new products and increased designer home calls.

At September 30, 2024, there were 142 Company-operated design centers, up one from a year ago as we opened a new location in Albuquerque, NM and relocated a design center to Peoria, AZ.

Gross Profit and Margin

Consolidated gross profit for the three months ended September 30, 2024 decreased $6.3 million or 6.3% compared to the prior year quarter due to a decline in sales, increased import rates and higher financing costs. These decreases were partially offset by a change in the sales mix with a higher percentage of our total sales coming from our retail segment, lower raw material input costs, the ability to leverage investments in technology to reduce headcount, and an increase in average ticket price. Wholesale gross profit decreased 15.8% due to the 13.5% decline in sales and a 100-basis point reduction in gross margin. Retail gross profit increased 0.1% due to a 30-basis point improvement in gross margin partially offset by the 0.6% decrease in net sales.

Consolidated gross margin for the three months ended September 30, 2024 was 60.8%, a 30-basis point decrease over the prior year period due to deleveraging from lower delivered sales partially offset by a change in sales mix, reduced headcount, selective price increases and lower manufacturing raw material input costs. Our sales mix, which represents the percentage of retail sales compared to total consolidated sales, increased to 86.0% in the current year first quarter, up from 81.5% in the prior year, which positively impacted our consolidated gross margin. Wholesale gross margin was down 100 basis points over the prior year period due to reduced manufacturing volumes, which led to increased variances, inflationary pressures on labor wages, increased import rates and lower contract sales partially offset by reduced headcount and lower raw material input costs. Retail gross margin improved 30 basis points compared with the prior year period due to selective price increases, a higher average ticket price and a decline in sales of designer floor samples partially offset by higher financing costs.

SG&A Expenses and Operating Income

(in thousands)

SG&A expenses for the three months ended September 30, 2024 decreased $4.2 million or 5.3% primarily due to lower selling expenses from less delivered net sales and a reduction in general and administrative costs. When expressed as a percentage of sales, SG&A expenses were 49.3%, an uptick from 49.0% in the prior year first quarter primarily due to fixed cost deleveraging from lower delivered sales.

Consolidated selling expenses were down 7.9% during the first quarter of fiscal 2025. Wholesale selling expenses, which includes our logistics operation, decreased 18.1% primarily from a lower volume of units shipped, fewer outgoing distribution costs including lower fuel costs and headcount, and decreased hardware and software maintenance spend. Retail selling expenses were down 4.4% due to lower headcount and lower designer variable compensation and reduced delivery costs from lower delivered revenue. Our consolidated advertising expenses during the first quarter of fiscal 2025 were comparable to the prior year and represented 2.3% of net sales.

Consolidated general and administrative expenses declined 1.8% primarily due to lower employee benefit costs and decreased retail display costs as we incurred significant spend in the prior year as part of our Interior Design Destination refresh project.

Compared to a year ago, our consolidated headcount is down 8.5% or by 312 employees (including 237 wholesale employees and 75 retail employees) at September 30, 2024, as we continue to identify operational efficiencies and leverage the use of technology to streamline workflows throughout our vertically integrated enterprise.

Restructuring and other charges, net of gains

Restructuring and other charges, net of gains for the three months ended September 30, 2024 were $0.2 million compared to $1.5 million in the prior year. The restructuring charge of $0.2 million in the current year first quarter primarily related to $0.3 million in losses from the impact of Hurricane Helene on our western North Carolina distribution facility during September 2024. The prior year first quarter charge of $1.5 million primarily related to the $2.1 million net loss from the Vermont flood partially offset by a $0.7 million gain related to the amortization of the deferred liability generated from the sale-leaseback transaction completed August 1, 2022.

Consolidated Operating Income

Consolidated operating income for the three months ended September 30, 2024 decreased $0.8 million or 4.3%, and as a percentage of net sales was 11.4%, compared to 11.2% in the prior year quarter. Adjusted operating income, which excludes restructuring and other charges, net of gains, was $17.8 million, or 11.5% of net sales compared with $19.8 million, or 12.1% of net sales in the prior year quarter. The decrease in operating income was driven primarily by lower consolidated net sales partially offset by lower SG&A expenses.

Wholesale operating income for the three months ended September 30, 2024 was $11.9 million or 13.8% of net sales compared with $14.4 million or 14.5% in the prior year quarter. Adjusted wholesale operating income, which excludes restructuring and other charges, net of gains, was $12.2 million or 14.2% of net sales compared with $16.5 million or 16.6% of net sales in the prior year quarter. The decrease in wholesale operating income was driven by the 13.5% decline in wholesale net sales and the 100-basis point reduction in our wholesale gross margin partially offset by the 7.3% decrease in wholesale SG&A expenses.

Retail operating income for the three months ended September 30, 2024 was $7.5 million, or 5.6% of sales, compared with $5.2 million, or 3.9% of sales in the prior year quarter. Adjusted retail operating income, which excludes restructuring and other charges, net of gains was $7.3 million or 5.5% of net sales compared with $4.5 million or 3.4% of net sales in the prior year quarter. The increase in retail operating income was driven primarily by the 30-basis point improvement in retail gross margin and the 4.6% reduction in retail SG&A expenses partially offset by a decline in retail net sales of 0.6%.

Income Taxes, Net Income and Diluted EPS

(in thousands)

Income Tax Expense

Income tax expense for the three months ended September 30, 2024 was $5.0 million compared with $5.1 million in the prior year first quarter due to the $0.4 million decrease in income before income taxes and a lower consolidated effective tax.

Net Income

Net income for the three months ended September 30, 2024 was $14.7 million compared with $14.9 million in the prior year period. Adjusted net income, which removes the after-tax impact of restructuring and other charges, net of gains was $14.9 million, down 7.2% from the prior year period. The decrease in net income was driven by the $9.6 million decrease in consolidated net sales and gross margin erosion of 30-basis points partially offset by lower SG&A expenses.

Diluted EPS

Diluted EPS for the three months ended September 30, 2024 was $0.57 compared with $0.58 per diluted share in the prior year period. Adjusted diluted EPS was $0.58, down 7.9% compared with the prior year period. The decrease in diluted EPS was due to lower consolidated net sales and gross margin erosion partially offset by lower SG&A expenses.

Regulation G Reconciliations 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 EPS. 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 the marginal tax rate for each period presented.

Liquidity

Our sources of liquidity include cash and cash equivalents, short-term and long-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 are committed to maintaining a strong balance sheet and monitoring our liquidity closely.

Our available liquidity is summarized below:

(in thousands)

At September 30, 2024, we had working capital of $156.0 million compared with $179.0 million at June 30, 2024 and a current ratio of 2.0 at September 30, 2024, comparable to 2.2 at June 30, 2024 and 2.1 a year ago. Our non-U.S. subsidiaries held $2.4 million in cash and cash equivalents at September 30, 2024, which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At September 30, 2024, we held cash and cash equivalents of $59.2 million compared with $69.7 million at June 30, 2024. Cash and cash equivalents aggregated to 8.0% of our total assets at September 30, 2024 compared with 9.4% at June 30, 2024. In addition to cash and cash equivalents of $59.2 million, we had aggregated investments of $127.2 million at September 30, 2024 compared with $126.1 million at June 30, 2024. Our investments at September 30, 2024 were within U.S. Treasury bills and notes, which we expect will further enhance our returns on excess cash. Our short-term U.S. Treasury bills totaled $76.7 million with maturities of less than one year while our long-term U.S. Treasury notes totaled $50.4 million with maturities ranging between one and two years. We believe our cash, cash equivalents and investments are available to meet short-term liquidity needs.

Our cash and cash equivalents decreased $10.5 million or 15.0% during the first three months of fiscal 2025 due to $20.2 million in cash dividends paid, capital expenditures of $3.6 million and $2.2 million in taxes paid related to net share settlement of vested RSUs and PSUs partially offset by net cash provided by operating activities of $15.1 million.

The following table illustrates the main components of our cash flows:

(in millions)

25

Cash Provided by Operating Activities

We generated $15.1 million in cash from operating activities during the first three months of fiscal 2025 compared with $16.7 million in the prior year period. This decrease was primarily the result of changes in working capital coupled with lower net income. Changes in working capital reflect the timing of software renewals and estimated tax payments. Inventory levels at September 30, 2024 were higher than at June 30, 2024 due to delayed shipments of contract orders. Restructuring payments during the first quarter of fiscal 2025 were $0.1 million compared to $0.2 million in the prior year period.

Cash Used in Investing Activities

Cash used in investing activities was $2.8 million during the first three months of fiscal 2025 compared with cash provided of $2.0 million in the prior year. During fiscal 2025, we had $0.8 million of net purchases of investments, which related to $26.1 million of short-term U.S. treasuries that matured during September 2024 and were subsequently reinvested for $25.2 million. In the prior year first quarter we had $30.7 million of U.S. treasuries mature, which were subsequently reinvested for $25.0 million. Capital expenditures during the first quarter of fiscal 2025 were $3.6 million compared with $3.7 million in the prior year period.

Cash Used in Financing Activities

Cash used in financing activities was $22.5 million in the current year, a decrease from $23.8 million in the prior year period primarily due to the decrease in the special cash dividend paid, which went from $0.50 per share in the prior year period to $0.40 in the current year. This decrease was partially offset by an 8.3% increase in our regular quarterly dividend, which rose from $0.36 to $0.39 per share, effective May 2024. In addition, during the first quarter of fiscal 2025, a total of 70,495 shares valued at $2.2 million were repurchased from employees to satisfy their withholding tax obligations upon vesting of RSUs and PSUs. This compared to $2.1 million repurchased for similar withholding tax obligations in the prior year period.

Restricted Cash

We present restricted cash as a component of total cash and cash equivalents on our consolidated statements of cash flows and within Other assets on our consolidated balance sheets. At September 30, 2024 and June 30, 2024, we held $0.6 million and $0.5 million, respectively, of restricted cash related to our insurance captive.

Exchange Rate Changes

Due to changes in exchange rates, our cash and cash equivalents decreased by $0.2 million during the first three months of fiscal 2025 compared with a decrease of $0.1 million 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. At September 30, 2024, 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 September 30, 2024 and June 30, 2024, respectively, there were $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 2025 totaled $3.6 million compared with $3.7 million in the prior year period. Current year capital expenditures related primarily to further expansion of our manufacturing facilities in Mexico, retail design center relocations and improvements, investments in technology, and remodeling costs associated with our hotel. During the first quarter of fiscal 2025, we further strengthened our vertically integrated enterprise through the purchase of certain property, plant and equipment for $1.6 million, which increased our manufacturing operations in Silao, Mexico.

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 of Directors 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 quarter of fiscal 2025 by paying a special dividend of $0.40 per share in addition to a regular quarterly dividend of $0.39 per share. During the first three months of fiscal 2025, we paid total cash dividends of $20.2 million. We have paid a special cash dividend each of the past five years and paid an annual cash dividend every year since 1996. Although we expect to continue to declare and pay 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 set 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 2025 or 2024. At September 30, 2024, we had a remaining 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. At June 30, 2024, we had total contractual obligations of $197.9 million, including $151.3 million related to operating lease commitments and $30.7 million of open purchase orders. Except for $8.5 million in operating lease payments made to our landlords and $4.7 million of operating lease assets obtained in exchange for $4.7 million of operating lease liabilities during the first three months of fiscal 2025, there were no other material changes in our contractual obligations as previously disclosed in our 2024 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 disclose our significant accounting policies in Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included in our 2024 Annual Report on Form 10-K. There have been no changes in our significant accounting policies from those disclosed in our 2024 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 disclose our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2024 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first three months of fiscal 2025 from those disclosed in our 2024 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, 2024, 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, 2024 was $59.2 million while our investments (short and long-term) totaled $127.2 million. Our cash and cash equivalents consist of demand deposits and money market funds with original maturities of three months or less and are reported at fair value. Our investments consist of U.S. treasuries with maturities ranging up to 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 at September 30, 2024. 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 the operation of our Company-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 U.S. 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 Quarterly Report on Form 10-Q.

A hypothetical 10% weaker U.S. dollar against all foreign currencies at September 30, 2024 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 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. 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 inflation.

Commercial Real Estate Market Risk

We have potential exposure to market risk related to conditions in the commercial real estate market. At September 30, 2024, there were 142 Company-operated retail design centers, of which 49 are owned and 93 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 consolidated balance sheets for leased design center locations and warehouse and distribution facilities. At September 30, 2024, the unamortized balance of such right-of-use assets totaled $112.0 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, 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, 2024, 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 2025 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes during the first three months of fiscal 2025 to the risk factors discussed in Part I, Item 1A, Risk Factors, in our 2024 Annual Report on Form 10-K.