Ethan Allen Interiors Inc. — Form 10-Q Summary
Period clarification: The filing is for the fiscal third quarter ended March 31, 2021, and nine months ended March 31, 2021. This differs from the request metadata label “2020 Q3.” Financial amounts below are in U.S. dollars; dollar figures are millions except per-share data.
Business context
Ethan Allen is a vertically integrated home furnishings designer, manufacturer and retailer, with wholesale and retail segments, about 300 design centers across company-operated and independent networks, and nine manufacturing facilities. Approximately 75% of products are made in North America.
Financial results and liquidity
| Metric | Three months ended Mar. 31, 2021 | Year-over-year change | Nine months ended Mar. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $177.0 | +18.2% | $506.8 | +1.7% |
| Gross profit / margin | $101.4 / 57.3% | $83.9 / 56.1% | $288.5 / 56.9% | $275.3 / 55.2% |
| Operating income / margin | $19.0 / 10.7% | Loss of $0.8 / (0.5%) | $53.2 / 10.5% | $27.1 / 5.4% |
| Net income | $15.6 | Prior-year loss of $0.2 | $41.8 | $21.0 |
| Diluted EPS | $0.61 | Prior-year loss of $0.01 | $1.65 | $0.80 |
| Operating cash flow | $36.2 | Prior-year $15.3 | $102.1 | Prior-year $38.7 |
- Third-quarter adjusted operating income was $19.6 million (11.1% margin) and adjusted diluted EPS was $0.58. Nine-month adjusted operating income was $55.3 million (10.9% margin) and adjusted diluted EPS was $1.63. These are company-defined non-GAAP measures.
- Cash and cash equivalents were $109.0 million at March 31, 2021, versus $72.3 million at June 30, 2020. The company had no bank debt, having repaid the remaining $50.0 million revolving-facility borrowing in September 2020. Credit-facility borrowing-base availability was $78.3 million; $5.0 million of standby letters of credit were outstanding.
- Nine-month cash from operations of $102.1 million reflected improved working capital, including a $51.2 million increase in customer deposits and deferred revenue. Capital expenditures were $10.3 million and cash dividends paid were $11.6 million.
- Current assets were $291.1 million and current liabilities $225.9 million. Customer deposits and deferred revenue were $115.3 million, up from $64.0 million at June 30, 2020.
Changes, operating trends and management commentary
- Third-quarter wholesale sales rose 15.8% to $107.8 million and company-operated retail sales rose 22.2% to $141.4 million. For nine months, wholesale sales increased 7.1% and retail sales 3.1%.
- Third-quarter written orders increased 51.8% in retail and 39.0% in wholesale; wholesale orders excluding government orders rose 48.3%. Retail e-commerce sales grew 161% year over year. Management reported a record-high order backlog and said demand continued to exceed product availability.
- Management attributed improved profitability to higher sales, stronger wholesale manufacturing productivity, retail sales mix, and expense controls. Operating expenses fell 2.7% in the quarter and 5.2% for the nine-month period, notwithstanding differences in prior-year restructuring gains.
- The prior-year nine-month comparison included an $11.5 million gain on sale of the Passaic, New Jersey property. In the current nine-month period, restructuring and impairment charges were $1.6 million, including lease-exit costs; property sales generated a $1.2 million gain. A $0.4 million inventory obsolescence charge was recorded in the second quarter.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management said it expects consumer interest in home furnishings to continue and expects increased production to help reduce backlogs and delivery lead times; it estimated manufacturing could take the next couple of quarters to catch up with demand.
- COVID-19-related labor constraints, supply-chain disruption, delayed imported inventory and raw materials, and limited ocean-freight capacity were prolonging fulfillment times. Management warned that elevated container costs could adversely affect results and that renewed restrictions, weaker economic conditions, or changing consumer demand could harm the business.
- The company said it expected available cash, operating cash flow and its credit facility to fund operations and obligations for at least the next 12 months. It expected to continue comparable quarterly dividends, subject to business conditions and Board approval; the declared quarterly dividend was $0.25 per share.
- Management considered the potential outcome of pending legal matters unlikely to have a material adverse effect, while noting litigation outcomes are uncertain. The filing reports $2.2 million of unrecognized tax benefits, of which $0.3 million was expected to decrease within 12 months.
- Disclosure controls were assessed as effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Confirm the reporting period: the filing covers fiscal Q3 2021, not 2020 Q3.
- Track backlog conversion, manufacturing capacity, delivery lead times, and whether the strong written-order trends translate into recognized sales and cash collections.
- Monitor freight, input, and labor costs and their effect on gross margins, as well as customer deposits and inventory levels.
- Review the company’s reconciliations and definitions for adjusted, non-GAAP measures; they exclude selected charges and gains and are not substitutes for GAAP results.
- Assess ongoing cash generation, dividend sustainability, credit-facility availability, and the possible effects of COVID-19 and economic conditions.