# ETHAN ALLEN INTERIORS INC (ETD) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ETHAN ALLEN INTERIORS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/896156/000143774922021450/eth20220630_10k.htm
Accession: 0001437749-22-021450
Filing date: 2022-08-29
Report date: 2022-06-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ETD/
All MD&A years: /company/ETD/mda/
Previous year: /company/ETD/mda/fy2021/ (FY 2021)
Next year: /company/ETD/mda/fy2023/ (FY 2023)

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our 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 Consolidated Financial Statements and related Notes included under Item 8 of this Annual Report on Form 10-K.

Impact of COVID-19 on our Business

For a discussion of how COVID-19 has impacted and may continue to impact our business and financial condition, please refer to the discussion under the heading Impact of COVID-19 on our Business in Part I, Item 1 of this Annual Report on Form 10-K. In addition, refer to Item 1A. Risk Factors of this Annual Report on Form 10-K for further discussion of the potential impact of the COVID-19 pandemic on our business.

Executive Overview

Who We Are. Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. We provide complimentary interior design service to our clients and sell a full range of home furnishing products through a retail network of design centers located throughout the United States and abroad as well as online at ethanallen.com. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of June 30, 2022, the Company operates 141 retail design centers; 137 located in the United States and four in Canada. Our independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate ten manufacturing facilities, including four manufacturing plants, one sawmill, one rough mill and a kiln dry lumberyard in the United States, two upholstery manufacturing plants in Mexico and one case goods manufacturing plant in Honduras. Approximately 75% of our products are manufactured or assembled in the North American plants. We also contract with various suppliers located in Europe, Asia and other various countries to produce products that support our business.

Business Model. Ethan Allen has a distinct vision of American style, rooted in the kind of substance that we believe differentiates us from our competitors. Our business model is to maintain continued focus on (i) providing relevant product offerings, (ii) capitalizing on the professional and personal service offered to our customers by our interior design professionals, (iii) leveraging the benefits of our vertical integration including a strong manufacturing presence in North America, (iv) regularly investing in new technologies across key aspects of our vertically integrated business, (v) maintaining a strong logistics network, (vi) communicating our messages with strong advertising and marketing campaigns, and (vii) utilizing our website, ethanallen.com, as a key marketing tool to drive traffic to our retail design centers.

Our competitive advantages arise from:

[[GREPCENT_TABLE]]
[["","\u25cf","offering a wide array of custom made-to-order products across upholstery, case goods, and accent product categories;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","complimentary design service of our interior design professionals combined with technology;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our North American manufacturing workshops providing customization capabilities and high-quality products of the finest craftsmanship;"]]
[[/GREPCENT_TABLE]]

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

[[GREPCENT_TABLE]]
[["","\u25cf","our strong retail network, both of Company-operated locations and independent licensees;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our logistics network of national distribution centers and retail home delivery centers providing white-glove home delivery service; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our continued ability to leverage our vertically integrated structure."]]
[[/GREPCENT_TABLE]]

Our strategy emphasizes the aim to position Ethan Allen as a preferred brand offering complimentary design service together with products of superior style, quality and value to provide customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we continue to expand our reach to a broader consumer base through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We continuously monitor changes in home fashion trends through industry events and fashion shows, internal market research, and regular communication with our retailers and design center design professionals who provide valuable input on consumer trends.

Product Offering Introductions. New product offerings continue to evolve and transform to meet the changing demands and tastes of our customers. Our offerings are focused on the three key lifestyles of Timeless & Refined, Carefree & Relaxed and Livable Modern. The majority of the products we sell are built by artisans in our North American plants using best-in-class construction techniques, which we believe positions Ethan Allen as a quality and fashion leader in the home furnishing industry. We design and build the majority of the products we sell, which is an important facet of our vertically integrated business as it enables us to control the design specifications and establish consistent levels of quality across all our product programs. During fiscal 2022, we introduced several new products in upholstery, home office, lighting, outdoor living, decorative accents and a new flooring program. A year ago we strengthened our living and dining room categories along with new bedding and mattress offerings, by introducing new products and styles. In addition, our outdoor product category offerings continue to be enhanced. To facilitate a strong projection of our product offerings, the interior of our design centers are organized, both in room settings that project the category lifestyle, and by product grouping to facilitate comparisons of the styles and tastes of our customers. To further enhance the experience, we use technology to expand the range of products viewed by including content from our website and 3D digital images in applications used on large touch-screen flat panel displays.

Fiscal 2022 Financial Year in Review. As we celebrate our ninth decade as innovative interior designers, manufacturers and retailers, we remain focused on constant reinvention and maintaining an entrepreneurial attitude. We believe our vertically integrated business is key to our success and continues to produce positive results and position us for future growth. In what was a dynamic and volatile fiscal year marked by rising costs and global supply chain challenges, we delivered strong sales growth and record earnings for the full fiscal 2022 year. We continue to develop relevant product offerings, of which about 75% are made in our North American manufacturing workshops.

During fiscal 2022, we executed on several key initiatives, including: introduced new product offerings in many areas including upholstery, home office, lighting, outdoor living, decorative accents and a new flooring program; expanded our upholstery manufacturing in North Carolina; opened multiple new design centers that project our unique vision of American style while combining complimentary interior design services with technology; celebrated our 90 years of innovation by holding a virtual convention under the theme of “Vertical Integration: the Key to Our Service”; launched the state-of-the-art immersive 3D Virtual Design Center which showcases our vast product portfolio while fostering collaboration between interior designers and clients; reaffirmed our commitment to maintain and grow our North American manufacturing including wage increases and the creation of new jobs; increased our regular quarterly cash dividend by 16% in November 2021 and then another 10% in April 2022; and paid a special cash dividend of $0.75 per share in August 2021.

During fiscal 2022 year we continued to benefit from consumer focus on the home since the onset of the COVID-19 pandemic created strong demand for our product offerings and interior design services. Through the collective efforts of our associates, the Company was able to execute on many initiatives that helped lead to strong full year fiscal 2022 results. Many of the changes implemented in recent years, such as manufacturing and optimization initiatives, reductions in employee headcount, increased use and leverage of technology and the elimination of non-essential spending, have allowed us to control expenses and improve our operating leverage. We expanded manufacturing production capacity during fiscal 2022, which is now above pre-COVID-19 pandemic levels, and helped us significantly improve delivery lead-time and reduce our high backlogs. Our custom upholstery products, made in our North American workshops, ship in about 6 weeks, as compared to 14 weeks a year ago. Our wood products, made in our North American workshops, now average about 14 weeks as compared to 16 weeks a year ago. This helped reduce our wholesale backlog to $102.4 million as of June 30, 2022, down 14.7% from a year ago. We continue to work through our existing order backlog, but are unable to reasonably predict the timing and size of reductions to our backlog.

31

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

For the full fiscal 2022 year, we delivered consolidated net sales growth of 19.4%, an operating margin of 16.9%, diluted earnings per share (“EPS”) of $4.05, cash from operations of $69.4 million and returned $48.3 million to shareholders through cash dividends. While our retail segment written orders were down 4.6% compared to a strong fiscal 2021, retail orders were up 14.9% compared to fiscal 2019 (prior to the start of the COVID-19 pandemic). Wholesale segment written orders were lower by 0.5% compared to fiscal year 2021, but up 7.6% compared with fiscal 2019. The positive net sales growth within both our wholesale and retail segments combined with our ability to operate more efficiently through the use of technology and reduced headcount (when compared to pre-COVID-19 pandemic levels) helped us expand consolidated gross margin, operating margin and diluted earnings per share. We ended the fiscal 2022 year with a strong balance sheet, including cash and investments of $121.1 million as of June 30, 2022 compared to $104.6 million as of June 30, 2021. Our ending inventory balance of $176.5 million was up 22.6% over last year in order to further support higher levels of production and help protect against future supply chain disruptions and price increases. Customer deposits from written orders totaled $121.1 million at June 30, 2022 a decrease of $9.6 million compared to fiscal 2021 due to increased manufacturing capacity and related deliveries combined with the pace of written orders slowing. Our Board increased our regular quarterly cash dividend twice during the fiscal year and paid a special cash dividend, bringing the total amount of dividends paid to $48.3 million in fiscal 2022. As of June 30, 2022, our employee count was 4,239, up 1.2% in the past 12 months, as we further strengthen our manufacturing and retail teams.

Vertical Integration. 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. In recent years, we have executed on key initiatives to further optimize our manufacturing and logistics, including converting our Old Fort, North Carolina case goods manufacturing operations into a national distribution center, expanding our existing Maiden, North Carolina manufacturing campus and most recently consolidating our Atoka, Oklahoma distribution center operations into our Old Fort, North Carolina facility. 

Ukraine/Russia Conflict. We are closely monitoring the current and potential impact of the Russian invasion of Ukraine on our business, our employees and our customers. We have taken all necessary steps to ensure compliance with all applicable regulatory restrictions on international trade and financial transactions. We have no offices in Russia or Ukraine, but are monitoring the regional and global ramifications of the unfolding events in the area. At this time, we have not had and do not anticipate a significant impact to our future results of operations.

Fiscal 2023 and Beyond. As we celebrate 90 years of innovation, we remain focused on constant reinvention and maintaining an entrepreneurial attitude. In the near-term, we remain focused on managing the business to work through higher backlog at the end of our fiscal year and to service our customers. We believe we are well-positioned to maximize our opportunities during fiscal 2023 with our relevant product offerings, our advantage of vertical integration, our North American manufacturing plants, our interior design focused retail network, a strong logistics network and a healthy balance sheet, while recognizing the impact of a slower economy and continued inflation.

Key Operating Metrics

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

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended June 30,"],["","","2022","","","% of Sales","","","% Chg","","","2021","","","% of Sales","","","% Chg","","","2020","","","% of Sales","","","% Chg"],["Net sales","","$","817.8","","","","100.0","%","","","19.4","%","","$","685.2","","","","100.0","%","","","16.2","%","","$","589.8","","","","100.0","%","","","(21.0","%)"],["Gross profit","","$","484.7","","","","59.3","%","","","23.3","%","","$","393.1","","","","57.4","%","","","21.7","%","","$","323.1","","","","54.8","%","","","(21.1","%)"],["Adjusted gross profit(1)","","$","484.7","","","","59.3","%","","","23.1","%","","$","393.7","","","","57.5","%","","","19.8","%","","$","328.6","","","","55.7","%","","","(20.2","%)"],["Operating income","","$","138.3","","","","16.9","%","","","78.9","%","","$","77.3","","","","11.3","%","","","427.8","%","","$","14.6","","","","2.5","%","","","(56.9","%)"],["Adjusted operating income(1)","","$","134.2","","","","16.4","%","","","67.1","%","","$","80.3","","","","11.7","%","","","370.6","%","","$","17.1","","","","2.9","%","","","(69.0","%)"],["Net income","","$","103.3","","","","12.6","%","","","72.1","%","","$","60.0","","","","8.8","%","","","574.2","%","","$","8.9","","","","1.5","%","","","(65.4","%)"],["Adjusted net income(1)","","$","100.3","","","","12.3","%","","","67.0","%","","$","60.1","","","","8.8","%","","","344.5","%","","$","13.5","","","","2.3","%","","","(67.5","%)"],["Diluted EPS","","$","4.05","","","","","","","","70.9","%","","$","2.37","","","","","","","","597.1","%","","$","0.34","","","","","","","","(64.6","%)"],["Adjusted diluted EPS(1)","","$","3.93","","","","","","","","65.8","%","","$","2.37","","","","","","","","355.8","%","","$","0.52","","","","","","","","(66.7","%)"],["Cash flow from operating activities","","$","69.4","","","","","","","","(46.6","%)","","$","129.9","","","","","","","","146.5","%","","$","52.7","","","","","","","","(4.6","%)"],["Return on equity","","","26.4","%","","","","","","","","","","","17.7","%","","","","","","","","","","","3.9","%"],["Wholesale written orders","","","","","","","","","","","(0.5","%)","","","","","","","","","","","31.7","%","","","","","","","","","","","(17.9","%)"],["Retail written orders","","","","","","","","","","","(4.6","%)","","","","","","","","","","","47.7","%","","","","","","","","","","","(18.4","%)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Refer to the Regulation G Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. generally accepted accounting principles (\u201cGAAP\u201d) to adjusted key financial metrics."]]
[[/GREPCENT_TABLE]]

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The following table shows selected design center location information.

[[GREPCENT_TABLE]]
[["","","Fiscal 2022","","","Fiscal 2021"],["","","Independent","","","Company-","","","","","","","Independent","","","Company-"],["","","retailers","","","operated","","","Total","","","retailers","","","operated","","","Total"],["Retail Design Center activity:"],["Balance at July 1","","","161","","","","141","","","","302","","","","160","","","","144","","","","304"],["New locations","","","7","","","","2","","","","9","","","","18","","","","3","","","","21"],["Closures","","","(13",")","","","(2",")","","","(15",")","","","(17",")","","","(6",")","","","(23",")"],["Transfers","","","-","","","","-","","","","-","","","","-","","","","-","","","","-"],["Balance at June 30","","","155","","","","141","","","","296","","","","161","","","","141","","","","302"],["Relocations (in new and closures)","","","-","","","","1","","","","1","","","","-","","","","2","","","","2"],["Retail Design Center Geographic locations:"],["United States","","","33","","","","137","","","","170","","","","34","","","","136","","","","170"],["Canada","","","-","","","","4","","","","4","","","","-","","","","5","","","","5"],["China","","","105","","","","-","","","","105","","","","109","","","","-","","","","109"],["Other Asia","","","11","","","","-","","","","11","","","","11","","","","-","","","","11"],["Europe","","","1","","","","-","","","","1","","","","1","","","","-","","","","1"],["Middle East","","","5","","","","-","","","","5","","","","6","","","","-","","","","6"],["Total","","","155","","","","141","","","","296","","","","161","","","","141","","","","302"]]
[[/GREPCENT_TABLE]]

Results of Operations

For an understanding of the significant factors that influenced our financial performance in fiscal 2022 compared with fiscal 2021, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented under Item 8 in this Annual Report on Form 10-K. Refer to Results of Operations under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in Part II of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on August 19, 2021, for an analysis of the fiscal year 2021 results as compared to fiscal year 2020.

Fiscal 2022 Compared to Fiscal 2021

[[GREPCENT_TABLE]]
[["(in thousands)","","Fiscal Year Ended"],["","","June 30,"],["","","2022","","","2021","","","% Change"],["Consolidated net sales","","$","817,762","","","$","685,169","","","","19.4","%"],["Wholesale net sales","","$","483,842","","","$","413,076","","","","17.1","%"],["Retail net sales","","$","689,884","","","$","554,971","","","","24.3","%"],["Consolidated gross profit","","$","484,706","","","$","393,107","","","","23.3","%"],["Consolidated gross margin","","","59.3","%","","","57.4","%"]]
[[/GREPCENT_TABLE]]

Consolidated net sales were $817.8 million, an increase of 19.4% compared to the prior year period. Net sales increased by 17.1% within our wholesale segment and by 24.3% in the retail segment. While the pace of demand has slowed compared to last year, we experienced strong demand for our products in fiscal 2022, and although wholesale written orders declined 0.5% compared to fiscal 2021, they are above pre-pandemic levels. Throughout fiscal 2022, we increased manufacturing production and inventory levels as well as took pricing actions to counteract rising material and freight costs. These efforts along with increasing receipt of offshore products and a strong backlog led to higher deliveries and when combined with the prior year impact from the COVID-19 pandemic, which negatively impacted our ability to deliver product to customers in 2021, helped grow consolidated net sales in 2022 by 19.4%. However, supply and labor constraints continued to create challenges, especially during the first two quarters of our fiscal 2022 year. In addition, we experienced an increase in our manufacturing productivity in 2022, as well as an increase in imported products and raw materials from a higher volume of shipping container receipts, which supported our sales growth in 2022, including a 28.8% sales growth in the fourth quarter of fiscal 2022 compared to fourth quarter 2021.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Wholesale net sales increased 17.1% to $483.8 million primarily due to a 25.8% increase in intersegment sales to our Company-operated design centers combined with 16.5% increase in contract sales partially offset by lower sales to independent licensees. Excluding intersegment sales to our retail segment, wholesale net sales decreased due to lower independent licensee sales. The 16.5% increase in our contract business sales was primarily from the General Services Administration (“GSA”), an independent agency of the United States government. During fiscal 2022, we have seen strong order growth from the GSA and when combined with high backlog and increased production, led to an increase in net sales during the period. Written orders from our GSA contract increased 50.4% during fiscal 2022 compared with a year prior. Our international net sales were down 28.3% primarily due to a reduction in net sales to China while our net sales to our independent North American retail network were down 6.9% primarily from a reduction in the number of licensee locations and economic uncertainty. Our sales to international independent licensees represented 2.6% of total wholesale net sales in 2022 compared to 4.3% in the prior year period.

We track and disclose wholesale written orders, which represent orders booked through all of our channels. Written orders help show the current pace or trend of customer transactions. The lag time between customers placing orders and delivery grew in fiscal 2021 due to demand outpacing shipments. However in fiscal 2022, primarily due to our increase in manufacturing productivity, net shipments outpaced customer demand, which led to a decrease in wholesale backlog. Written orders are intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.

Wholesale orders were down 0.5% in fiscal 2022 compared with fiscal year 2021, but up 7.6% compared to fiscal 2019. When compared to fiscal 2021, wholesale orders during fiscal 2022 from our Company-operated design centers decreased 3.6%, our independent North American retail network decreased 8.8% and our international dealers decreased 40.3%. After the reopening of all our retail design centers in early fiscal 2021, we experienced a significant increase in demand leading to a strong, but difficult fiscal 2021 prior year comparison. International orders were impacted by a 55.8% reduction in orders received from China during fiscal 2022, mainly from prolonged COVID-19 related lockdowns, the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. Partially offsetting these decreases was a 63.2% increase in orders received during fiscal 2022 from our contract business, including from the GSA. When compared to fiscal 2019 (pre-pandemic levels), written orders from our Company-operated design centers were up 12.1% and our contract business orders were 48.2% higher while our independent North American retail network decreased by 5.3% and international retailers were down 57.6%. Existing wholesale order backlog decreased in the last 12 months, which we attribute to the higher level of manufacturing productivity and related shipments of product. We ended the fiscal 2022 year with wholesale backlog of $102.4 million, down 14.7% from fiscal 2021 but still up $56.0 million or 120.8% from June 30, 2019. The number of weeks of wholesale backlog as of June 30, 2022 was down 33% compared to last year, with the most notable improvements seen within upholstery and case goods as production continues to ramp up and recently exceeded pre-COVID-19 levels. In the near-term, our teams are effectively managing the business to work through the higher order backlog and to service our customers.

Retail net sales from Company-operated design centers increased 24.3% to $689.9 million compared with the prior year period. There was a 24.6% increase in net sales in the United States, while sales from our Canadian design centers increased 14.7%. The growth in retail net sales of 24.3% was primarily due to the higher volume of deliveries from increased manufacturing production, product price increases enacted over the past 12 months, increased premier home delivery revenue, strong backlog and the prior year being negatively impacted by production delays as a result of the COVID-19 pandemic. As noted earlier, after the reopening of all our retail design centers in early fiscal 2021, we experienced a significant increase in demand that moderated in fiscal 2022. As a result, retail written orders declined 4.6% year over year, however they increased 14.9% compared to fiscal 2019. Partially offsetting the strong retail net sales was lower e-commerce business, down 38.1% year over year, continuing the shift back to traffic within the design centers. We remain focused on growing our same-store sales through improved execution at the design center level as well as opening new design centers, primarily in markets that can be serviced through our regional distribution centers, where we see opportunity for growth. As of June 30, 2022, there were 141 Company-operated design centers, the same as last year. We plan to open multiple new design centers during fiscal 2023.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated gross profit increased 23.3% to $484.7 million compared with the prior year period due to sales growth within both our wholesale and retail segments, a change in the sales mix, recent product pricing actions taken, higher manufacturing production, benefits realized from the ongoing manufacturing and logistics optimization project and a favorable product mix partially offset by higher input costs. Wholesale gross profit increased 10.4% due to a 17.1% increase in wholesale net shipments, efficiencies gained from higher manufacturing production levels, product pricing actions taken, and benefits being realized from the previously executed optimization of manufacturing and logistics initiatives. While each product category within wholesale (upholstery, case goods and home accents) expanded gross profit during fiscal 2022, wholesale gross margin declined due to the higher raw material and freight costs. Our inability to keep pace with inflationary pressures negatively impacted our wholesale gross profit during the first half of fiscal 2022 as we saw significant raw material and freight cost increases. In particular, the price of raw materials involved with upholstery manufacturing, including plywood, foam, frames and fabric, continued to escalate in price over the past twelve months. To help minimize impacts from increasing costs, we believe we have taken necessary pricing actions to align our invoice price more closely with our production costs. These pricing actions combined with raw material and freight cost stabilization in the second half of fiscal 2022 helped grow gross profit for the full fiscal 2022 year. Retail gross profit was up due to a 24.3% increase in net shipments combined with a 240-basis point improvement in gross margin from a favorable change in product mix, higher premier home delivery revenue, an increase in average ticket sale, product pricing actions taken and less clearance sales partially offset by promotional fees from financing promotions.

Consolidated gross margin was 59.3% compared with 57.4% a year ago due to a change in the sales mix, a favorable product mix, product pricing actions and higher manufacturing productivity partially offset by higher wholesale input costs. Benefits realized from increased productivity from the ongoing manufacturing and logistics optimization helped to minimize margin pressure from rising freight and raw material costs. Retail sales, as a percentage of total consolidated sales, were 84.4% in the current year, up from 81.0% in the prior year period, which positively affected consolidated gross margin. We expect this higher percentage of retail sales to consolidated sales to moderate towards normalized historical levels as we increase delivery of the high wholesale order backlog, including a high contract business backlog. We expect our margins to moderate and range between 56.0% to 58.0% due to rising inflation and a return of our sales mix to more historical norms.

[[GREPCENT_TABLE]]
[["(in thousands)","","Fiscal year Ended"],["","","June 30,"],["","","2022","","","2021","","","% Change"],["Selling, General & Administrative (\u201cSG&A\u201d) expenses","","$","350,917","","","$","313,411","","","","12.0","%"],["Restructuring and other impairment charges, net of gains","","$","(4,461",")","","$","2,411","","","","n/a"],["Consolidated operating income","","$","138,250","","","$","77,285","","","","78.9","%"],["Consolidated operating margin","","","16.9","%","","","11.3","%"],["Wholesale operating income","","$","63,930","","","$","52,281","","","","22.3","%"],["Retail operating income","","$","80,496","","","$","28,824","","","","179.3","%"]]
[[/GREPCENT_TABLE]]

SG&A expenses increased to $350.9 million, or 42.9% of net sales, compared with $313.4 million, or 45.7% of net sales in the prior year period. SG&A expenses, when expressed as a percentage of sales, decreased 280 basis points in fiscal 2022, compared with the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 12.0% while consolidated net sales grew at a much faster rate of 19.4%, which led to improved operating leverage at both the retail and wholesale segment. The 12.0% increase in SG&A expenses was primarily driven by higher selling costs of 17.9% and a 3.6% increase in general and administrative expenses. Retail selling expenses were up 20.5% due to the 24.3% increase in net sales, which drove higher delivery costs as well as increased variable compensation. Wholesale selling costs, which includes logistics, grew by 11.4% as fuel and freight costs increased from higher sales volumes and rising commodity prices. These selling costs were partially offset by a reduction in marketing spend. During fiscal 2022, we reduced our advertising in various mediums including national television and regional radio markets, thereby reducing our overall advertising spend compared to the prior year. However, through our digital campaigns, we have substantially increased our digital marketing outreach, which helped us reach more households through the publication of digital magazines. General and administrative expenses increased 3.6% during fiscal 2022 primarily due to higher compensation from additional headcount, increased occupancy and maintenance costs, additional office expenses from higher headcount within our manufacturing plants and higher retail merchandising and display costs in our design centers from new product introductions.

Restructuring and other impairment charges, net of gains was a gain of $4.5 million compared to a charge of $2.4 million in the prior year. The current year gain of $4.5 million primarily related to the sale of three properties for a pre-tax gain of $5.4 million partially offset by severance and other lease exit costs. The prior year charge of $2.4 million related primarily to lease exit costs within the retail segment as a result of an early termination of a lease, the closing and subsequent exiting of a retail design center and the payment to assign a lease to an independent third-party in addition to the impairment of long-lived assets held at a retail design center location. 

35

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Operating income was $138.3 million compared with $77.3 million in the prior year. Adjusted operating income, which excludes restructuring and other charges, was $134.2 million, or 16.4% of net sales in fiscal 2022, up from $80.3 million, or 11.7% of net sales in the prior year. The significant increase in operating income was driven by the $132.6 million increase in consolidated net sales, retail gross margin expansion, reduced marketing spend and strong cost containment measures partially offset by wholesale gross margin contraction and a 12.0% increase in SG&A expenses, including higher delivery and freight costs. Our ability to maintain disciplined cost and expense controls, including cost containment measures and expense management during fiscal 2022 was a key to operating income growth. Compared to a year ago, our headcount is up 51 associates or 1.2%. However, compared to June 30, 2019, our headcount is down 497 associates. Our ability to operate the business with global headcount down 10.5% from 2019 has contributed to consolidated operating income and margin expansion. The majority of these headcount reductions since 2019 were within our retail segment, which is down 33.9% from 2019 while wholesale is up 4.1% from 2019 due to our ramping up of manufacturing capacity.

Wholesale operating income totaled $63.9 million, or 13.2% of net sales, compared to $52.3 million at 12.7% of net sales in the prior year. The current year wholesale operating income included $3.9 million gain on the sale of two properties. Adjusted wholesale operating income was up $7.9 million or 15.0% due to wholesale net sales growth of 17.1%, reduced marketing spend, cost containment measures, prudent hiring throughout the year and manufacturing production levels that have now exceeded pre-COVID-19 pandemic levels. These benefits were partially offset by wholesale gross margin contraction from higher raw material costs, increased distribution costs from incremental volume and price and increased headcount within merchandising. Wholesale SG&A expenses, when expressed as a percentage of sales, decreased 180 basis points in fiscal 2022, compared with the prior year, primarily due to higher sales volume relative to fixed costs. SG&A expenses were up 6.8% while net sales grew at a much faster rate of 17.1%, which led to improved operating leverage.

Retail operating income was $80.5 million, or 11.7% of sales, compared to $28.8 million, or 5.2% of sales a year ago. The increase was primarily due to a $134.9 million increase in net sales, a 240-basis point expansion in retail gross margin, a pre-tax gain of $1.5 million from the sale of a previously closed retail location and our management of operating expenses, which grew at a lower rate than net sales. While selling, delivery and variable compensation expenses were up due to the growth in sales volume, total retail operating expenses including restructuring and impairment charges, when expressed as a percentage of net sales, decreased 410 basis points. This decrease was due to our leverage of fixed costs, cost control measures implemented at the onset of the COVID-19 pandemic, reduced marketing spend while having strong net delivered sales from a high order backlog and prudent hiring, including adding 48 net new associates for 4.2% headcount growth, with most being added as designers and operational support staff. Retail restructuring and impairment charges increased retail operating income by $1.3 million during fiscal 2022 compared to a reduction of $2.5 million a year ago.

[[GREPCENT_TABLE]]
[["(in thousands, except per share data)","","Fiscal Year Ended"],["","","June 30,"],["","","2022","","","2021","","","% Change"],["Income tax expense","","$","34,841","","","$","16,406","","","","112.4","%"],["Effective tax rate","","","25.2","%","","","21.5","%"],["Net income","","$","103,280","","","$","60,005","","","","72.1","%"],["Diluted EPS","","$","4.05","","","$","2.37","","","","70.9","%"]]
[[/GREPCENT_TABLE]]

Income tax expense was $34.8 million compared with $16.4 million in the prior year primarily due to the $61.7 million increase in income before income taxes and the prior year reversal of a valuation allowance. Our consolidated effective tax rate was 25.2% compared with 21.5% in the prior year. Our effective tax rate of 25.2% varies from the 21% federal statutory rate primarily due to state taxes. The increase in the effective tax rate compared with the prior year was primarily due to a reduction in our valuation allowance on retail state and local deferred tax assets in the prior year period.

Net income was $103.3 million compared with $60.0 million in the prior year. Adjusted net income, which removes the after-tax impact of restructuring and other impairment charges, was $100.3 million, up 67.0% from the prior year period due to stronger net sales, improved retail and consolidated gross margins, cost containment measures resulting in minimizing operating expense growth and improving manufacturing production and delivery of products to customers partially offset by higher raw material and freight costs.

Diluted EPS was $4.05 compared to $2.37 per diluted share in the prior year. Adjusted diluted EPS was $3.93, up 65.8%. Our operating margin expansion, combined with double-digit delivered sales growth, helped generate record profits for the full fiscal 2022 year.

36

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

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 gross profit and margin, adjusted operating income and margin, adjusted wholesale operating income and margin, adjusted retail operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the 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.

[[GREPCENT_TABLE]]
[["(in thousands, except per share data)","","Fiscal Year Ended June 30,"],["","","2022","","","2021","","","% Change"],["Consolidated Adjusted Gross Profit / Gross Margin"],["GAAP Gross profit","","$","484,706","","","$","393,107","","","","23.3","%"],["Adjustments (pre-tax) *","","","-","","","","639"],["Adjusted gross profit *","","$","484,706","","","$","393,746","","","","23.1","%"],["Adjusted gross margin *","","","59.3","%","","","57.5","%"],["Adjusted Operating Income / Operating Margin"],["GAAP Operating income","","$","138,250","","","$","77,285","","","","78.9","%"],["Adjustments (pre-tax) *","","","(4,010",")","","","3,050"],["Adjusted operating income *","","$","134,240","","","$","80,335","","","","67.1","%"],["Consolidated Net sales","","$","817,762","","","$","685,169","","","","19.4","%"],["GAAP Operating margin","","","16.9","%","","","11.3","%"],["Adjusted operating margin *","","","16.4","%","","","11.7","%"],["Consolidated Adjusted Net Income / Adjusted Diluted EPS"],["GAAP Net income","","$","103,280","","","$","60,005","","","","72.1","%"],["Adjustments, net of tax *","","","(3,003",")","","","54"],["Adjusted net income","","$","100,277","","","$","60,059","","","","67.0","%"],["Diluted weighted average common shares","","","25,522","","","","25,352"],["GAAP Diluted EPS","","$","4.05","","","$","2.37","","","","70.9","%"],["Adjusted diluted EPS *","","$","3.93","","","$","2.37","","","","65.8","%"],["Wholesale Adjusted Operating Income / Adjusted Operating Margin"],["Wholesale GAAP operating income","","$","63,930","","","$","52,281","","","","22.3","%"],["Adjustments (pre-tax) *","","","(3,183",")","","","552"],["Adjusted wholesale operating income *","","$","60,747","","","$","52,833","","","","15.0","%"],["Wholesale net sales","","$","483,842","","","$","413,076","","","","17.1","%"],["Wholesale GAAP operating margin","","","13.2","%","","","12.7","%"],["Adjusted wholesale operating margin *","","","12.6","%","","","12.8","%"],["Retail Adjusted Operating Income / Adjusted Operating Margin"],["Retail GAAP operating income","","$","80,496","","","$","28,824","","","","179.3","%"],["Adjustments (pre-tax) *","","","(827",")","","","2,498"],["Adjusted retail operating income *","","$","79,669","","","$","31,322","","","","154.4","%"],["Retail net sales","","$","689,884","","","$","554,971","","","","24.3","%"],["Retail GAAP operating margin","","","11.7","%","","","5.2","%"],["Adjusted retail operating margin *","","","11.5","%","","","5.6","%"]]
[[/GREPCENT_TABLE]]

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

* Adjustments to reported GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following:

[[GREPCENT_TABLE]]
[["(in thousands)","","Fiscal Year Ended June 30,"],["","","2022","","","2021"],["Inventory reserves and write-downs (wholesale)","","$","-","","","$","585"],["Optimization of manufacturing and logistics (wholesale)","","","-","","","","54"],["Adjustments to gross profit","","$","-","","","$","639"],["Inventory reserves and write-downs (wholesale)","","$","-","","","$","585"],["Optimization of manufacturing and logistics (wholesale)","","","-","","","","356"],["Gain on sale of property, plant and equipment (wholesale)","","","(3,913",")","","","-"],["Gain on sale of property, plant and equipment (retail)","","","(1,518",")","","","(473",")"],["Severance and other charges (wholesale)","","","727","","","","(389",")"],["Severance and other charges (retail)","","","243","","","","811"],["Impairment of long-lived assets and lease exit costs (retail)","","","451","","","","2,160"],["Adjustments to operating income","","$","(4,010",")","","$","3,050"],["Adjustments to income before income taxes","","$","(4,010",")","","$","3,050"],["Related income tax effects on non-recurring items(1)","","","1,007","","","","(747",")"],["Income tax benefit from valuation allowance change","","","-","","","","(2,249",")"],["Adjustments to net income","","$","(3,003",")","","$","54"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Calculated using a tax rate of 25.1% in current fiscal year and 24.5% in prior fiscal year"]]
[[/GREPCENT_TABLE]]

Liquidity

We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, to allow us to take advantage of opportunities and to execute our long-term strategic initiatives. Our sources of liquidity include cash and cash equivalents, short-term investments, cash 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, including fiscal 2023 contractual obligations. We continue to monitor our liquidity closely during this continued period of uncertainty and volatility globally, as well as within our industry, related to the COVID-19 pandemic.

We believe our liquidity (cash and cash equivalents on hand of $109.9 million, short-term investments of $11.2 million, cash flow from operating activities of $69.4 million and amounts available under our credit facility of $121.0 million), will be sufficient to fund our operations, including changes in working capital, anticipated capital expenditures, fiscal 2022 contractual obligations of $83.1 million and other financing activities, as they occur, for at least the next 12 months.

As of June 30, 2022, we had working capital of $131.1 million compared to $71.4 million at June 30, 2021 and a current ratio of 1.61 at June 30, 2022 compared to 1.32 a year ago. During this continued period of uncertainty and volatility, we will continue to monitor our liquidity. Included in our cash and cash equivalents at June 30, 2022, is $8.1 million held by foreign subsidiaries, a portion of which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At June 30, 2022, we held cash and cash equivalents of $109.9 million compared with $104.6 million a year ago. Cash and cash equivalents aggregated to 15.3% of our total assets at both June 30, 2022 and 2021. In addition, we had short-term investments of $11.2 million to further enhance our returns on cash at June 30, 2022, compared with none at June 30, 2021. Our short-term investment portfolio contains various holdings, types and maturities. We classify our investments as short-term investments based on their nature and their availability for use in current operations. We believe the overall credit quality of our portfolio is strong, with our cash equivalents and our available-for-sale securities portfolio consisting primarily of high-quality investment-grade securities.

38

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Our cash and cash equivalents increased $5.3 million during fiscal 2022 due to net cash provided by operating activities of $69.4 million and $10.6 million in proceeds received from sales of property, plant and equipment partially offset by $48.3 million in cash dividends paid, including a special dividend of $19.0 million, capital expenditures of $13.4 million and net purchases of investments of $11.2 million.

The following table illustrates the main components of our cash flows for each of the last three fiscal years (in millions):

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended June 30,"],["","","2022","","","2021","","","2020"],["Operating activities"],["Net income","","$","103.3","","","$","60.0","","","$","8.9"],["Non-cash operating lease cost","","","30.3","","","","29.9","","","","32.0"],["Other non-cash items, including depreciation and amortization","","","12.4","","","","23.6","","","","22.6"],["Restructuring payments","","","(1.6",")","","","(2.8",")","","","(9.1",")"],["Changes in working capital","","","(75.0",")","","","19.2","","","","(1.7",")"],["Total provided by operating activities","","$","69.4","","","$","129.9","","","$","52.7"],["Investing activities"],["Capital expenditures","","$","(13.4",")","","$","(12.0",")","","$","(15.7",")"],["Acquisitions, net of cash acquired and other","","","-","","","","-","","","","(1.3",")"],["Proceeds from sales of property, plant and equipment","","","10.6","","","","4.9","","","","12.4"],["Purchases of investments, net of sales","","","(11.2",")","","","-","","","","-"],["Total used in investing activities","","$","(14.0",")","","$","(7.1",")","","$","(4.6",")"],["Financing activities"],["Borrowings from revolving credit facility","","$","-","","","$","-","","","$","100.0"],["Payments on borrowings","","","-","","","","(50.0",")","","","(50.0",")"],["Repurchases of common stock","","","-","","","","-","","","","(24.3",")"],["Taxes paid related to net share settlement of equity awards","","","(0.8",")","","","(0.1",")","","","-"],["Dividend payments","","","(48.3",")","","","(43.3",")","","","(21.5",")"],["Proceeds from employee stock plans","","","1.1","","","","3.0","","","","0.1"],["Payments for debt issuance costs","","","(0.5",")","","","-","","","","-"],["Payments on financing leases","","","(0.5",")","","","(0.6",")","","","(0.6",")"],["Total (used in) provided by financing activities","","$","(49.0",")","","$","(91.0",")","","$","3.7"]]
[[/GREPCENT_TABLE]]

Cash Provided by (Used in) Operating Activities. Fiscal 2022 cash generated from operations totaled $69.4 million, a decrease from $129.9 million in the prior year primarily due to an increase in working capital partially offset by higher net income generated during the period. The increase in working capital was primarily from a reduction in customer deposits as net shipments outpaced written orders, higher inventory to increase material availability to support expanded manufacturing and distribution capacity to service the strong backlog and increased accounts receivable arising from strong sales in the Company’s wholesale segment, especially from higher contract business sales. Restructuring payments of $1.6 million in fiscal 2022 included $0.8 million in severance and $0.5 million in lease exit costs.

Cash Provided by (Used in) Investing Activities. Fiscal 2022 cash used in investing activities was $14.0 million, an increase from $7.1 million last year due to $11.2 million of net purchases of investments (net of proceeds from sales of investments) combined with a $1.4 million increase in capital expenditures partially offset by proceeds received from the sale of properties. During fiscal 2022, we invested a net $11.2 million in municipal bonds, commercial paper and certificates of deposit with maturities of one year or less. These short-term investments are reported within Investments in our consolidated balance sheet as of June 30, 2022. Capital expenditures of $13.4 million during fiscal 2022 related to further expansion of our manufacturing in North Carolina, manufacturing plant upgrades, including additional machinery and equipment to further increase capacity, safety and efficiency, construction of new retail design centers, updating the projection of many existing design centers and investments in technology upgrades and infrastructure. We completed the sale of three properties to independent third parties during fiscal 2022 for total cash proceeds of $10.6 million.

Cash Provided by (Used in) Financing Activities. Fiscal 2022 cash used in financing activities was $49.0 million compared with cash used of $91.0 million in the prior year. The significant decrease in cash used in financing activities was due to the repayment of $50.0 million in outstanding borrowings during fiscal 2021 partially offset by a $5.0 million increase in cash dividends paid. During March 2020, we borrowed a total of $100.0 million under the credit facility and repaid $50.0 million during the fourth quarter of fiscal 2020 with the remaining $50.0 million repaid in fiscal 2021.

39

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Total cash dividends paid during fiscal 2022 were $48.3 million, including a $0.75 per share special dividend paid in August 2021 totaling $19.0 million. The year ago first quarter did not have any cash dividends paid as the Board had previously suspended the cash dividend due to the COVID-19 impact. However, on August 4, 2020, our Board reinstated the regular quarterly cash dividend and declared a cash dividend, which was paid on October 22, 2020. The regular quarterly dividend was increased by 16% to $0.29 per share on November 30, 2021, and paid on January 5, 2022. Subsequently, the regular quarterly dividend was increased for a second time, this time by 10% to $0.32 per share and paid on May 25, 2022. There were no repurchases of common stock in either fiscal 2022 or 2021.

Restricted Cash. We present restricted cash as a component of total cash and cash equivalents as presented on our consolidated statement of cash flows and within Other Assets on our consolidated balance sheet. As of June 30, 2022, we held $1.0 million of restricted cash related to an Ethan Allen insurance captive. We did not hold any restricted cash as of June 30, 2021.

Exchange Rate Changes. Due to changes in exchange rates, our cash and cash equivalents decreased by $0.1 million during 2022. These changes had an immaterial impact on our cash balances held in Canada, Mexico, and Honduras.

Capital Resources, including Material Cash Requirements

Sources of Liquidity

Capital Needs. On January 26, 2022, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent and syndication agent and Capital One, National Association, as documentation agent. The Credit Agreement amended and restated the Second Amended and Restated Credit Agreement, dated as of December 21, 2018, as amended. The Credit Agreement provides for a $125 million revolving credit facility (the “Facility”), subject to borrowing base availability, with a maturity date of January 26, 2027. The Credit Agreement also provides us with an option to increase the size of the Facility up to an additional amount of $60 million. Availability under the Facility fluctuates according to a borrowing base calculated on eligible accounts receivable and inventory, net of customer deposits and reserves. The Facility includes covenants that apply under certain circumstances, including a fixed-charge coverage ratio requirement that applies when excess availability under the credit line is less than certain thresholds. As of June 30, 2022, 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. See Note 11, Credit Agreement, to the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K, for a further description of the Credit Agreement.

Letters of Credit. At June 30, 2022 and 2021, there was $4.0 million and $5.0 million, respectively, of standby letters of credit outstanding under the Facility.

Uses of Liquidity

Capital Expenditures. Capital expenditures in fiscal 2022 totaled $13.4 million, up $1.4 million compared with the prior year period. The increase over the prior year related primarily to our upholstery manufacturing expansion in North Carolina, case goods plant upgrades and improvements, including investments in technology, and the purchase of additional manufacturing equipment to further increase capacity at our manufacturing locations. In fiscal 2022, 53% of our total capital expenditures were for manufacturing capital projects while 39% related to retail design center development, expansion and renovation as well as installing additional technology within each design center, such as new designer workstations, tablets and enhanced security firewalls. The remaining 8% was for Corporate infrastructure, operations and IT system development to further enhance existing workflows.

We have no material contractual commitments outstanding for future capital expenditures and anticipate that cash from operations will be sufficient to fund future capital expenditures. We expect our fiscal 2023 capital expenditures to be moderately above fiscal 2022 levels as we further invest in technology, increase manufacturing capacity and open new or relocate multiple design centers while also continuing to improve all our design center projections.

Acquisitions. From time to time, we acquire design centers from our independent retailers in arm’s length transactions. There were no independent retailer acquisitions in fiscal 2022 or fiscal 2021.

40

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Focus on Shareholder Returns.

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 fiscal 2022 as the following actions were taken pertaining to dividends.

[[GREPCENT_TABLE]]
[["","\u25cf","On August 3, 2021, our Board declared a $0.75 per share special cash dividend in addition to our regular quarterly cash dividend of $0.25 per share, which was paid to shareholders on August 31, 2021"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","On November 30, 2021, our Board increased our regular quarterly cash dividend by 16% to $0.29 per share; the dividend was paid on January 5, 2022"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","On January 25, 2022, our Board declared a regular quarterly cash dividend of $0.29 per share, which was paid on February 8, 2022"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","On April 26, 2022, our Board increased our regular quarterly cash dividend by 10% to $0.32 per share; the dividend was paid on May 25, 2022"]]
[[/GREPCENT_TABLE]]

For the full fiscal 2022 year, we paid a total of $1.90 per share in cash dividends for an aggregate total of $48.3 million. This included the special dividend paid in August 2021 totaling $19.0 million. In the prior year, total dividends paid were $43.3 million. With our dividends, we have returned $189.5 million to shareholders over the past five years and $574.6 million since our initial public offering in 1993.

Although we expect to continue to declare and pay comparable quarterly cash dividends for the foreseeable future, the payment of future cash dividends is within the discretion of our Board of Directors and will depend on our earnings, operations, financial condition, capital requirements and general business outlook, among other factors. Our credit agreement also includes covenants that includes limitations on our ability to pay dividends.

Share Repurchase Program. There were no share repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during fiscal 2022 or 2021. At June 30, 2022, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our Share Repurchase Program. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions while also maintaining financial flexibility.

Material Cash Requirements from Contractual Obligations. Fluctuations in our operating results, levels of inventory on hand, operating lease commitments, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, the rate of written orders and net sales, levels of customer deposits on hand, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As of June 30, 2022, we had total contractual obligations of $193.2 million, a decrease from $203.9 million a year ago due to operating lease payments of $33.6 million during fiscal 2022 partially offset by $18.7 million in operating lease liabilities from new leases and modifications to existing leases entered into throughout fiscal 2022. Except for operating leases, there were no other material changes, outside of the ordinary course of business, in our contractual obligations during the fiscal year.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Our material cash requirements for our contractual obligations as of June 30, 2022 were as follows:

[[GREPCENT_TABLE]]
[["","\u25cf","Operating Leases. Our operating lease obligations decreased from $143.6 million last year to $131.6 million at June 30, 2022 due to monthly lease payments made to landlords and the exiting of certain retail leased spaces in the past 12 months partially offset by new leases and modifications to existing leases entered into throughout the fiscal 2022 year. We enter into operating leases in the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. During fiscal 2022, we entered into four new leases and modified 21 other leases in the form of a renewal or extension to the existing leased space. For more information on our operating leases, see Note 6, Leases, in the notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Open Purchase Orders. We had purchase obligations, defined as agreements that are enforceable and legally binding that specify all significant terms, including fixed or minimum quantities to be purchased, of $40.8 million at June 30, 2022, down from $50.2 million a year ago. We do, in the normal course of business, regularly initiate purchase orders for the procurement of (i) selected finished goods sourced from third-party suppliers, (ii) lumber, fabric, leather and other raw materials used in production, and (iii) certain outsourced services. All purchase orders are based on current needs and are fulfilled by suppliers within short time periods. At June 30, 2022, our open purchase orders with respect to such goods and services totaled $40.8 million and are to be paid in less than one year. The decrease in purchase orders was primarily due to lower open import vendor purchase orders as lead times have decreased from improved import product receipts combined with a reduction in upholstery purchase orders due to timing of inventory receipts, the stabilization of inventory levels and the slowing of written order trends, which has caused us to reduce our purchase order quantities to prevent excess inventory."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Long-term Debt. We had no outstanding borrowings under our revolving credit facility at June 30, 2022 or June 30, 2021, as we repaid $50.0 million in September 2020. Further discussion of our contractual obligations associated with long-term debt can be found in Note 11, Credit Agreement, in the notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Other Purchase Obligations. Other purchase commitments for services such as telecommunication, computer-related software, royalties, web development, insurance and other maintenance contracts was $19.7 million as of June 30, 2022, up from $8.8 million, primarily due to timing of contract signing and extensions. Significant multi-year contracts were extended in fiscal 2022 and include telecom services for our retail design centers, Microsoft Office software, our retail accounting and order entry system, web and e-commerce marketing tool software and technology used to create our 3D room planner and augmented reality."]]
[[/GREPCENT_TABLE]]

For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended June 30, 2021 and 2020, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, filed with the SEC on August 19, 2021.

Other Arrangements

We do not utilize or employ any other arrangements in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations. We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.

Product Warranties. As of June 30, 2022 and 2021, our product warranty liability totaled $1.2 million and $1.1 million, respectively. Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties and are provided based on terms that are generally accepted in the industry. All our domestic independent retailers are required to enter into and perform in accordance with the terms and conditions of a warranty service agreement. We record provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and make periodic adjustments to those provisions to reflect actual experience. On rare occasion, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyond the scope of our historical experience. We provide for such warranty issues as they become known and are deemed to be both probable and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience.

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Contingencies

We are involved in various claims and litigation as well as environmental matters, which arise in the normal course of business. Although the final outcome of these legal and environmental matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

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.

The following critical accounting estimates affect our consolidated financial statements.

Impairment of Long-Lived Assets, including the Assessment of the Carrying Value of Retail Design Center Long-lived Assets. The recoverability of our retail design centers’ long-lived assets is evaluated for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset or asset group. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, change in the intended use of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash flows over the remaining life of the primary asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis or independent third-party appraisal of the asset or asset group. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail segment is the individual design center. For retail design center level long-lived assets, expected cash flows are determined based on our estimate of future net sales, margin rates and expenses over the remaining expected terms of the leases.

Goodwill and Indefinite-Lived Intangible Assets. We review the carrying value of our goodwill and other intangible assets with indefinite lives at least annually, during the fourth quarter, or more frequently if an event occurs or circumstances change, for possible impairment.

Goodwill. For impairment testing, goodwill has been assigned to our wholesale reporting unit. We may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform a quantitative assessment.

A quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess. Estimating the fair value of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a number of factors, including sales, gross margin, general and administrative expenses, capital expenditures, EBITDA and cash flows, the selection of an appropriate discount rate, as well as market values and multiples of earnings and revenue of comparable public companies.

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To evaluate goodwill in a quantitative impairment test, the fair value of the reporting units is estimated using a combination of Market and Income approaches. The Market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). In the Market approach, the “Guideline Company” method is used, which focuses on comparing the Company’s risk profile and growth prospects to reasonably similar publicly traded companies. Key assumptions used for the Guideline Company method include multiples for revenues, EBITDA and operating cash flows, as well as consideration of control premiums. The selected multiples are determined based on public companies within our peer group, and if appropriate, recent comparable transactions are also considered. Control premiums are determined using recent comparable transactions in the open market. Under the Income approach, a discounted cash flow method is used, which includes a terminal value, and is based on management’s forecasts and budgets. The long-term terminal growth rate assumptions reflect our current long-term view of the market in which we compete. Discount rates use the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2022 utilizing a qualitative analysis and concluded it was more likely than not the fair value of our wholesale reporting unit was greater than its respective carrying value and no impairment charge was required. In performing the qualitative assessment, we considered such factors as macro-economic conditions, industry and market conditions in which we operate including the competitive environment and any significant changes in demand. We also considered our stock price both in absolute terms and in relation to peer companies.

Other Indefinite-Lived Intangible Assets. We also annually evaluate whether our trade name continues to have an indefinite life. Our trade name is reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, management’s plans for future operations, recent results of operations and projected future cash flows.

Similar to goodwill, we may elect to perform a qualitative assessment. If the qualitative evaluation indicates that it is more likely than not that the fair value of our trade name was less than its carrying value, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for our indefinite lived intangible asset and directly perform a quantitative assessment. To evaluate our trade name using a quantitative analysis, its fair value is calculated using the relief-from-royalty method. Significant factors used in the trade name valuation are rates for royalties, future revenue growth and a discount factor. Royalty rates are determined using an average of recent comparable values, review of the operating margins and consideration of the specific characteristics of the trade name. Future growth rates are based on the Company’s perception of the long-term values in the market in which we compete, and the discount rate is determined using the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

We performed our annual indefinite-lived intangible asset impairment test during the fourth quarter of fiscal 2022 utilizing a qualitative analysis and concluded it was more likely than not the fair value of our trade name was greater than its carrying value and no impairment charge was required. Qualitative factors reviewed included a review for significant adverse changes in customer demand or business climate that could affect the value of the asset, a product recall or an adverse action or assessment by a regulator.

Inventories. Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Cost is determined based solely on those charges incurred in the acquisition and production of the related inventory (i.e. material, labor and manufacturing overhead costs). We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-downs, taking into account future demand and market conditions. Our inventory reserves contain uncertainties that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. We adjust our inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices. If actual demand or market conditions change from our prior estimates, we adjust our inventory reserves accordingly throughout the period. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the periods presented.

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At June 30, 2022 and 2021, our inventory reserves totaled $2.1 million and $2.8 million, respectively. The decrease in our inventory reserve during fiscal 2022 was the result of improved manufacturing production combined with reduced obsolescence risk based on an improving rate of sale trends. In addition, during fiscal 2021, we recorded a non-cash charge of $0.6 million related to certain slow moving and discontinued inventory items, which was due to actual demand and forecasted market conditions for these inventory items being less favorable than originally estimated. When this inventory was subsequently disposed of during fiscal 2022, it was written-off against the inventory reserve, thus lowering it during the year.

Income Taxes. We are subject to income taxes in the United States and other foreign jurisdictions. Our tax provision is an estimate based on our understanding of laws in Federal, state and foreign tax jurisdictions. These laws can be complicated and are difficult to apply to any business, including ours. The tax laws also require us to allocate our taxable income to many jurisdictions based on subjective allocation methodologies and information collection processes.

We use the asset and liability method to account for income taxes. We recognize deferred tax assets and liabilities based on the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle those temporary differences. When we record deferred tax assets, we are required to estimate, based on forecasts of taxable earnings in the relevant tax jurisdiction, whether we are more likely than not to recover them. In making judgments about realizing the value of our deferred tax assets, we consider historic and projected future operating results, the eligible carry-forward period, tax law changes and other relevant considerations.

The Company evaluates, on a quarterly basis, uncertain tax positions taken or expected to be taken on tax returns for recognition, measurement, presentation, and disclosure in its financial statements. If an income tax position exceeds a 50% probability of success upon tax audit, based solely on the technical merits of the position, the Company recognizes an income tax benefit in its financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the amount for which a cash payment is expected to be made or tax positions settled within one year.

Business Insurance Reserves. We have insurance programs in place to cover workers’ compensation and health care benefits under certain employee benefit plans provided by the Company. The insurance programs, which are funded through self-insured retention, are subject to various stop-loss limitations. We accrue estimated losses using actuarial models and assumptions based on historical loss experience. As of June 30, 2022 and 2021, we had liabilities of $2.0 million related to health care coverage. We also carry workers’ compensation insurance subject to a deductible amount for which the Company is responsible on each claim. We had accrued liabilities of $3.8 million and $4.5 million related to workers’ compensation claims, primarily for claims that do not meet the per-incident deductible, as of June 30, 2022 and 2021, respectively. These business insurance reserves are recorded within Accrued compensation and benefits on our consolidated balance sheets.

Although we believe that the insurance reserves are adequate, the reserve estimates are based on historical experience, which may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate insurance reserves are based on numerous assumptions, some of which are subjective. We adjust insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.

Significant Accounting Policies

See Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included under Part II, Item 8, for a full description of our significant accounting policies.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included under Part II, Item 8, for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.

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