Ethan Allen Interiors Inc: Form 10-Q for the period ended Dec 31, 2025

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 2025 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (“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

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 risks and uncertainties disclosed in Part I, Item 1A, Risk Factors, in our 2025 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 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. Our strong network of entrepreneurial leaders and interior designers provide complimentary interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the 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 December 31, 2025, the Company operates 142 retail design centers, 137 located in the U.S. and 5 in Canada. We also have 45 independently owned and operated Ethan Allen design centers 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 1932. At December 31, 2025, we own and operate 11 manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and a kiln dry lumberyard in the U.S., three manufacturing plants in Mexico and one manufacturing plant in Honduras. We also partner with suppliers located in Europe, Asia, and other countries to produce and import various products that support the 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. Our business model is to maintain continued focus on: (i) providing relevant product offerings, (ii) capitalizing on the professional and personal service offered to our customers by our interior design professionals, (iii) leveraging the benefits of our vertical integration including a manufacturing presence in North America, (iv) investing in new technologies across key 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 customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. We seek to constantly reinvent our projection and product offerings through a broad selection of products, designed to complement one another, reflecting current fashion trends in home furnishing.

Talent. At December 31, 2025, our employee count totaled 3,149, with 2,177 in our wholesale segment and 972 in our retail segment. We continue to strengthen our teams while at the same time reducing headcount through operational efficiencies and have reduced headcount by 5.1% in the last 12 months and 30.7% less than December 2019.

Fiscal 2026 Second Quarter in Review (1). Our fiscal 2026 second quarter results were highlighted by a strong gross margin and robust balance sheet despite a challenging environment. Consolidated net sales were $149.9 million, a 4.7% decrease from the prior year quarter primarily due to fewer contract sales partially offset by higher average ticket price, incremental designer floor sample sales and fewer sales returns. Wholesale orders declined 19.3% while retail written orders declined 17.9%. Our demand trends reflect a difficult prior year comparison combined with macroeconomic and industry-specific challenges, including higher tariffs, the government shutdown, elevated inflation, lower consumer sentiment and reduced home sales. We maintained a strong consolidated gross margin of 60.9% due to a change in sales mix, selective price increases and lower headcount partially offset by increased promotional activity, incremental tariffs and higher designer floor sample sales. Our adjusted operating margin was 9.0% compared to 11.5% a year ago while adjusted diluted EPS was $0.44 compared with $0.59 a year ago. Lower operating margin was driven by fewer contract sales, increased promotions, lower unit volumes, incremental marketing spend, tariffs, elevated designer floor sample sales and increased employee benefit costs partially offset by change in sales mix, reduced freight, lower headcount, disciplined spending and a higher retail average ticket price. We ended the quarter with 187 Ethan Allen retail design centers, including 142 Company-operated and 45 independently owned and operated locations. Cash, cash equivalents and investments totaled $179.3 million at December 31, 2025 and we had no outstanding debt. We also continued our history of paying dividends to shareholders by paying a regular quarterly cash dividend of $10.0 million.

Additionally, in October 2025, we held our annual convention under the theme of Always Moving Forward. The program honored Ethan Allen’s history, reviewed initiatives in manufacturing, logistics, technology, marketing and retail, and celebrated interior designers both for achievement in written sales and design excellence. We also received several awards during the fiscal 2026 second quarter. Our upholstery operations in Silao, Mexico was designated as a Great Place to Work® for the eighth consecutive year, and our U.S. operations received a “High Score” on the 2025 Wood Furniture Scorecard prepared by the Sustainable Furnishings Council and the National Wildlife Federation.

(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 and six months ended December 31, 2025 and 2024, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q.

(in thousands)

21

Net Sales

Consolidated net sales decreased $7.3 million or 4.7% for the three months ended December 31, 2025 compared with the same prior year period. The decrease during the second quarter was driven by fewer contract sales partially offset by higher average ticket price, incremental designer floor sample sales and fewer sales returns. The first six months of fiscal 2026 were impacted by less contract sales, a decline in delivered unit volume, lower available starting backlog and reduced design center traffic.

Wholesale - Wholesale net sales decreased $7.7 million or 8.9% for the three months ended December 31, 2025. The decrease was driven primarily by lower contract sales, including shipments to the U.S. government General Services Administration (“GSA”). International sales represented 1.2% of total wholesale net sales during the second quarter of fiscal 2026 compared with 1.4% in the prior year quarter. The first six months of fiscal 2026 were impacted by lower contract sales, a decrease in sales to our U.S. independent dealers and lower net sales to China partially offset by elevated levels of intercompany sales to our retail segment related to new product introductions.

Wholesale written orders, which represent undelivered orders booked through all of our channels, were down 19.3% for the three months ended December 31, 2025 compared to the same prior year period primarily from the decline in orders from both our intersegment Company-operated design centers and independent retail network. For the first half of fiscal 2026, wholesale written orders were down 12.6% driven by declines across all our channels, including lower contract orders. The slowdown in U.S. government spending, including the recent government shutdown, resulted in lower incoming contract orders and available backlog. We ended the fiscal 2026 second quarter with wholesale backlog of $49.8 million, down 13.6% from a year ago and 6.9% lower in the past three months due to timing of incoming contract orders, which are at their highest in our fiscal first quarter and at their lowest every fiscal second quarter based on the U.S. government’s fiscal year-end. Lower undelivered backlog helped us improve customer lead times, including a reduction in the number of weeks of wholesale backlog at December 31, 2025 compared with a year ago.

Retail - Retail net sales increased $0.1 million or 0.1% for the three months ended December 31, 2025 compared with the same prior year period. The increase for the quarter was driven by higher starting retail backlog, incremental designer floor sample sales, fewer sales returns and an increase in average ticket price partially offset by lower incoming written orders and less design center traffic. Retail net sales during the first six months of fiscal 2026 fell by 1.5% due to lower delivered unit volumes, fewer written orders and reduced traffic partially offset by increased designer floor sample sales and a higher average ticket price.

Retail written orders for the three months ended December 31, 2025 decreased 17.9% compared to the same prior year period primarily due to macroeconomic challenges, the government shutdown and a difficult prior year comparison. The first six months of fiscal 2026 saw a decrease of 6.7% in written orders, which was primarily driven by a slowdown in orders during the just completed second quarter and a strong prior year comparable. We believe the strong value proposition of our current assortment along with the addition of several new products being introduced complement the wide array of custom home furnishings Ethan Allen has to offer.

There were 142 Company-operated design centers at December 31, 2025, up one compared with a year ago. During the just completed second quarter we relocated our San Diego, California design center and have plans to open new design centers in Rancho Cucamonga, California, Aventura, Florida and Vancouver, British Columbia (Canada) during 2026.

Gross Profit and Margin

Consolidated gross profit decreased $3.6 million for the three months ended December 31, 2025 compared with the same prior year period. The decrease in gross profit was driven by lower net sales, increased promotional activity, incremental tariffs and a change in product mix. These decreases were partially offset by a higher percentage of our total sales coming from the retail segment, lower inbound freight, reduced labor costs from lower headcount, higher designer floor sample sales and selective price increases that led to a higher average ticket price. Wholesale gross profit for the quarter decreased 12.4% due to lower contract sales and incremental tariffs partially offset by lower freight and labor costs. Retail gross profit decreased 3.7% primarily due to increased promotional activity which led to a 180-basis point reduction in the retail gross margin partially offset by higher designer floor sample sales and selective price increases. For the first six months of fiscal 2026, consolidated gross profit decreased $7.2 million due to $14.7 million fewer consolidated net sales, increased promotional activity and incremental tariffs partially offset by a higher percentage of total sales coming from the retail segment, lower headcount and selective price increases in the last 12 months.

Consolidated gross margin was 60.9% for the three months ended December 31, 2025 compared with 60.3% in the prior year period. Our second quarter consolidated gross margin expanded by 60 basis points due to a change in the sales mix, lower freight costs, reduced headcount and a higher retail average ticket price partially offset by increased promotional activity, incremental tariffs and elevated designer floor sample sales. Our sales mix, which represents the percentage of retail sales compared to total consolidated sales, increased to 89.6% in the current year, up from 85.4% in the prior year due to lower contract sales within our wholesale segment. Wholesale gross margin for the second quarter was down 120 basis points over the prior year period due to lower contract sales and incremental tariffs partially offset by lower inbound freight and labor costs. Retail gross margin declined 180 basis points compared with the prior year period due to increased promotional activity, elevated designer floor sample sales that carry a lower average margin and change in product mix partially offset by higher average ticket price. For the first six months of fiscal 2026, our consolidated gross margin increased 50 basis points to 61.1% due to change in the sales mix, lower raw material input costs, selective price increases, lower headcount and a higher retail average ticket price partially offset by increased promotional activity, elevated designer floor sample sales, higher inbound freight including incremental tariffs and deleveraging from lower delivered sales.

SG&A Expenses and Operating Income

(in thousands)

SG&A expenses increased 1.5% for the three months ended December 31, 2025 compared with the same prior year period. When expressed as a percentage of sales, SG&A expenses for the quarter were 51.9%, up from 48.8% in the prior year second quarter primarily due to fixed cost deleveraging from lower delivered sales combined with additional marketing spend, ongoing investments in technology and increased employee benefit costs, including medical and workers compensation. For the six months ended December 31, 2025, SG&A expenses increased 3.1% compared with the same prior year period as we invested in additional strategic marketing to further our brand. When expressed as a percentage of sales, SG&A expenses for the first half of fiscal 2026 were 53.1%, up from 49.0% in the prior year period primarily due to lower consolidated net sales. Disciplined spending, cost control initiatives and lower headcount helped to offset inflationary cost pressures and the incremental marketing investments.

Consolidated selling expenses were up 0.8% during the second quarter of fiscal 2026 primarily due to additional marketing. Retail selling expenses were up 2.4% due to increased advertising expenses, higher employee benefit costs and additional delivery expenses from the 0.1% increase in net sales. Wholesale selling expenses, which include our national logistics, decreased 4.2% due to a reduction in distribution volumes, less outbound freight, fewer headcount and lower fees associated with our contract business partially offset by incremental marketing costs, higher digital and web-technology spend and elevated employee benefit costs. For the first six months of fiscal 2026, consolidated selling expenses were up 3.1% primarily due to the 34.1% increase in marketing costs, incremental digital and web-technology spend and elevated employee benefit costs partially offset by reduced headcount and lower distribution volumes.

Our consolidated advertising expenses during the second quarter of fiscal 2026 increased by 25.2% compared to the prior year primarily due to increased digital media spend, including paid search and social campaigns as well as higher direct mail and trade campaign costs. Marketing expenses represented 3.2% of consolidated net sales in the current year second quarter, up from 2.5% in the prior year period.

Consolidated general and administrative expenses in the second quarter were up 2.5% compared to the prior year period due to increased employee benefit costs combined with higher occupancy costs from newly opened retail design centers partially offset by lower headcount. Wholesale general and administrative expenses were up $1.1 million due to higher employee benefit costs. Retail general and administrative expenses decreased by 1.0% due to reduced headcount partially offset by incremental rent associated with newly added design centers. For the first six months of fiscal 2026, consolidated general and administrative expenses were up 3.2% due to higher occupancy and employee benefit costs partially offset by lower headcount. Compared to a year ago, our consolidated headcount is down 5.1% or 169 associates, including 153 at wholesale and 16 at retail.

Restructuring and other charges, net of gains

A gain of $0.8 million was recorded within Restructuring and other charges, net of gains for the second quarter of fiscal 2026, compared to an expense of less than $0.1 million in the prior year period. Fiscal year-to-date restructuring and other charges, net of gains was a gain of $0.3 million compared to expense of $0.2 million in the prior year. Insurance proceeds from the Beecher Falls, Vermont fire, net of repair costs incurred, were partially offset by an early lease termination charge during fiscal 2026.

Consolidated Operating Income

Consolidated operating income of $14.2 million and $24.2 million decreased by $3.9 million, or 21.6%, and $11.5 million, or 32.3%, for the three and six months ended December 31, 2025, respectively, compared to the same prior year periods. As a percentage of net sales, consolidated operating income for the second quarter of fiscal 2026 was 9.5%, compared to 11.5% in the prior year quarter. Adjusted operating income for the second quarter of fiscal 2026 was $13.5 million, or 9.0% of net sales compared with $18.2 million, or 11.5% of net sales in the prior year quarter. For the first six months of fiscal 2026, adjusted operating income was $24.0 million, or 8.1% of net sales compared with $36.0 million, or 11.5% of net sales in the prior year period. Reduced operating income during fiscal 2026 was primarily driven by lower contract sales, incremental tariffs, increased promotional activity, additional marketing spend and higher employee benefit costs.

Wholesale operating income was $6.3 million and $14.2 million for the three and six months ended December 31, 2025, respectively, compared with $9.6 million and $21.5 million for the same prior year periods. As a percentage of net sales, wholesale operating income for the second quarter of fiscal 2026 was 8.0%, compared to 11.1% in the prior year quarter. Adjusted wholesale operating income was $5.6 million or 7.0% of net sales compared with $9.6 million or 11.1% of net sales in the prior year second quarter. For the first six months of fiscal 2026 wholesale operating income was $14.2 million, or 8.6% of net sales compared with $21.5 million, or 12.4% of net sales in the prior year period. The decrease in wholesale operating income for the three and six months was driven by a decline in contract sales combined with higher tariffs, incremental marketing and employee benefit costs.

Retail operating income was $3.7 million and $5.1 million for the three and six months ended December 31, 2025, respectively, compared with $6.7 million and $14.1 million for the same prior year periods. As a percentage of net sales, retail operating income for the second quarter of fiscal 2026 was 2.8% compared to 5.0% in the prior year quarter. The decrease was driven by the 180-basis point decrease in retail gross margin combined with higher marketing and occupancy costs partially offset by less headcount.

Other Income (Expense)

(in thousands)

Interest and other income, net includes interest income, foreign currency gains or losses and other income (expense), net. Interest and other income, net was $1.5 million for the three months ended December 31, 2025, down from $2.0 million a year ago due to lower interest rates combined with less available cash and investments. Interest and other income, net was $5.6 million for the six months ended December 31, 2025, an increase compared with $4.2 million a year ago due to a contract modification fee received by Ethan Allen during the first quarter of fiscal 2026. This fee was related to our private label card service provider.

Income Tax Expense, Net Income and Diluted EPS

(in thousands)

Income Tax Expense

Income tax expense was $4.0 million and $7.5 million for the three and six months ended December 31, 2025, respectively, compared with $5.1 million and $10.1 million in the same prior year periods. Our consolidated effective tax rate was 25.3% in the current year second quarter compared with 25.4% a year ago. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. Lower income tax expense during fiscal 2026 was driven by a reduction in income before income taxes as our effective tax rates were comparable in both periods presented.

Net Income

Net income was $11.7 million and $22.2 million for the three and six months ended December 31, 2025, respectively, compared with $15.0 million and $29.7 million in the same prior year periods, down 21.7% and 25.3% from the same prior year periods. Adjusted net income was $11.2 million and $22.1 million for the three and six months ended December 31, 2025, respectively, down 25.5% and 26.2% from the same prior year periods. The decline in net income for the three and six month periods was driven by lower wholesale net sales and increased SG&A expenses partially offset by a higher gross margin and lower income tax expense.

Diluted EPS

Diluted EPS was $0.46 and $0.87 for the three and six months ended December 31, 2025, respectively, compared to $0.59 and $1.16 in the same prior year periods. Adjusted diluted EPS was $0.44 and $0.86 for the three and six months ended December 31, 2025, respectively, compared to $0.59 and $1.17 in the same prior year periods. The decrease in diluted EPS was driven primarily by lower wholesale net sales, which led to deleveraging and lower net income.

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 requirements and contractual obligations and fulfill other cash requirements for day-to-day operations for at least the next 12 months, as well as to meet long-term liquidity requirements and contractual obligations, finance our long-term growth plans and invest in capital expenditures for the foreseeable future. We are committed to maintaining a robust balance sheet and monitoring our liquidity closely.

Our available liquidity is summarized below:

(in thousands)

At December 31, 2025, we had working capital of $176.2 million compared with $157.1 million at June 30, 2025 and a current ratio of 2.3 at December 31, 2025, compared with 2.0 at June 30, 2025. Our non-U.S. subsidiaries held $5.8 million in cash and cash equivalents at December 31, 2025, which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At December 31, 2025, we held cash and cash equivalents of $64.3 million compared with $76.2 million at June 30, 2025. Cash and cash equivalents aggregated to 9.0% of our total assets at December 31, 2025 compared with 10.3% at June 30, 2025. In addition to cash and cash equivalents, we had aggregated investments of $115.1 million at December 31, 2025 and $120.0 million at June 30, 2025. Our investments are in 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 $75.1 million with maturities of less than one year while our long-term U.S. Treasury notes totaled $40.0 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, cash equivalents and restricted cash decreased $12.4 million or 16.1% during the first six months of fiscal 2026 due to $26.3 million in cash dividends paid, capital expenditures of $5.3 million and $1.8 million in taxes paid related to net share settlement of equity awards partially offset by $15.0 million of net cash provided by operating activities and proceeds from insurance recoveries of $2.3 million.

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

(in millions)

27

Cash Provided by Operating Activities

We generated $15.0 million in cash from operating activities during the first six months of fiscal 2026 compared with $26.7 million in the prior year period due to lower net income and changes in working capital. The Company’s working capital increased by $19.1 million during the first six months of fiscal 2026, driven by lower customer deposits and a decrease in accrued compensation and benefits based on the timing of our bi-weekly payroll. The change in working capital was partially offset by $1.1 million in insurance recoveries related to losses incurred from the disposal of damaged inventory and facility cleanup in Beecher Falls, Vermont.

Cash Provided by (Used in) Investing Activities

Cash provided by investing activities was $0.8 million during the first six months of fiscal 2026 compared with cash used of $6.3 million in the prior year. During fiscal 2026, we had $4.9 million of net proceeds from the sale of investments, which related to $24.9 million of U.S. treasuries that matured and were subsequently reinvested for $20.0 million. In the prior year, we had $1.1 million of net proceeds from the sale of investments, which related to $36.3 million of short-term U.S. treasuries that matured during the year and the subsequent reinvestment of $35.2 million. Capital expenditures during the first six months of fiscal 2026 were $5.3 million, down from $7.4 million in the prior year period. During the first half of fiscal 2026 we received an additional $1.2 million in insurance proceeds related to the reconstruction of the facility damaged by the Beecher Falls, Vermont fire.

Cash Used in Financing Activities

Cash used in financing activities was $28.4 million in the current year compared with $32.5 million a year ago. Total dividends paid were $26.3 million during the first six months of fiscal 2026, a decrease from $30.1 million paid a year ago due to the reduction in the special cash dividend, which went from $0.40 per share last year to $0.25 per share in the current year. In addition, during the first half of fiscal 2026, a total of 62,627 shares valued at $1.8 million were repurchased from employees to satisfy their withholding tax obligations upon vesting of stock-based awards. This compared to $2.2 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 December 31, 2025 and June 30, 2025, we held $0.3 million and $0.8 million, respectively, of restricted cash related to our insurance captive.

Exchange Rate Changes

Due to changes in foreign currency exchange rates, namely among the Mexican Peso, Canadian Dollar and Honduran Lempira against the U.S. Dollar, our cash and cash equivalents increased by $0.2 million during the first six months of fiscal 2026 compared with a decrease of $0.4 million in the prior year period. These changes had an immaterial impact on our cash balances held in Mexico, Canada 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 December 31, 2025, 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 $121.2 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 December 31, 2025 and June 30, 2025, respectively, there were $3.8 million and $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 2026 totaled $5.3 million compared with $7.4 million in the prior year period. Current year capital expenditures were primarily for new retail design centers, additional manufacturing equipment, reconstruction of our Beecher Falls, Vermont outbuilding and investments in technology. Three new Company-operated design centers located in San Diego, California, Colorado Springs, Colorado and Concord, Ontario (Canada) were opened during fiscal 2026 that showcase our unique style while combining complimentary interior design services with technology.

We anticipate total capital expenditures to rebuild the structure damaged by the Beecher Falls, Vermont fire to be between $2.5 million and $3.5 million, of which we have incurred $0.7 million through December 31, 2025, with the remainder to be incurred over the next two fiscal quarters. We have no other material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures at least for the next 12 months and foreseeable future.

Dividends. Our Board of Directors has sole authority to determine if and when we will declare future dividends and on what terms. During the first six months of fiscal 2026, we paid total cash dividends of $26.3 million, including a special dividend of $0.25 per share in addition to regular quarterly dividends of $0.39 per share in both the first and second quarters. We have paid a special cash dividend in each of the past six fiscal years and paid a cash dividend every year since 1996. Although we expect to continue to declare and pay 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 six months of fiscal 2026 or 2025. At December 31, 2025, 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 payments, the rate of written orders and net sales, levels of customer deposits on hand, the payment of cash dividends, and capital expenditures to support the 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, 2025, we had total contractual obligations of $182.8 million, including $146.3 million related to operating and finance lease commitments and $21.0 million of open purchase orders. Except for $17.4 million in operating lease payments made to our landlords and $12.6 million of operating lease assets obtained in exchange for $12.6 million of operating lease liabilities during fiscal 2026, there were no other material changes in our contractual obligations as previously disclosed in our 2025 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 2025 Annual Report on Form 10-K. There have been no changes in our significant accounting policies during the first six months of fiscal 2026 from those disclosed in our 2025 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 2025 Annual Report on Form 10-K. There have been no significant changes in our critical accounting estimates during the first six months of fiscal 2026 from those disclosed in our 2025 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, 2025, 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 SOFR. We believe 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, 2025 was $64.3 million while our investments (short and long-term) totaled $115.1 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 December 31, 2025. 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 December 31, 2025 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 Risk

We are exposed to risk with respect to tariffs assessed on raw materials, component parts, upholstered wooden furniture and finished goods we import into the U.S. We are also subject to risks relating to other changes affecting imports, as we manufacture components and finished goods in Mexico and Honduras. Recent tariffs made effective in October 2025 under Section 232 of the Trade Expansion Act of 1962, have resulted in upholstered wood products produced and exported out of our Mexican manufacturing facilities being subject to a 25% tariff when entering the U.S. Our case goods products produced and exported out of our Honduras facility are currently subject to tariff but are reduced based on the consumption of U.S. sourced raw material wood under the Central America-Dominican Republic Free Trade Agreement. With regards to our imported finished goods and raw materials, our exposure is primarily concentrated on imported case goods from Indonesia, select fabrics from Asia and imported home accent products, consisting mostly of lighting from China and area rugs from India.

The introduction of additional tariffs by the U.S. and reciprocal tariffs by other countries during the 2025 calendar year has led to incremental costs for our raw materials and finished goods and negatively impacted our wholesale and consolidated margins. To help offset the impact of these additional tariffs, we increased retail selling prices during the second quarter of fiscal 2026. Should duties rise or additional tariffs be enacted, we will evaluate whether additional retail price increases to help offset these incremental costs are warranted. We also believe our focus on manufacturing in North America (which represents approximately 75% of the furniture we sell) provides us with a strategic advantage to mitigate the impact of higher tariffs. By controlling more aspects of the production process within North America, we believe we can mitigate some of our vulnerability to disruptions and cost increases associated with importing materials and finished goods from regions affected by tariff-related volatility.

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 wood, 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, including shipping container and fuel prices, for delivering our products. Should future commodity prices and transportation costs rise, we will determine whether a retail price increase to help offset these incremental 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 retail selling prices. 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 reduce 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 December 31, 2025, there were 142 Company-operated retail design centers, of which 48 are owned and 94 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 December 31, 2025, the unamortized balance of such right-of-use assets totaled $107.9 million. Should we have to close one or more 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 December 31, 2025, 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 2026 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 six months of fiscal 2026 to the Company’s risk factors disclosed in Part I, Item 1A, Risk Factors, in our 2025 Annual Report on Form 10-K.