Ethan Allen Interiors Inc. — Fiscal 2022 Second-Quarter 10-Q
Reporting period: Three and six months ended December 31, 2021. The company is a vertically integrated luxury home furnishings designer, manufacturer and retailer, operating Wholesale and Retail segments. Approximately 75% of products are made or assembled in North America.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $208.1 million | $178.8 million | $390.4 million | $329.9 million |
| Gross profit / margin | $122.3 million / 58.8% | $101.3 million / 56.7% | $231.5 million / 59.3% | $187.1 million / 56.7% |
| Operating income / margin | $36.3 million / 17.4% | $22.6 million / 12.6% | $63.7 million / 16.3% | $34.2 million / 10.4% |
| Net income | $26.9 million | $16.9 million | $47.0 million | $26.2 million |
| Diluted EPS | $1.05 | $0.67 | $1.85 | $1.04 |
| Operating cash flow | Six-month figure: $22.7 million | Six-month figure: $65.9 million | $22.7 million | $65.9 million |
Q2 sales rose 16.4%; Retail segment sales increased 24.0% and Wholesale segment sales, including intersegment sales, increased 14.2%. Retail operating income improved substantially, while Wholesale operating income fell 23.4% to $9.7 million in the quarter as raw-material, freight, production and labor costs pressured margins. The six-month period showed the same divergence: Retail operating income rose to $37.0 million, while Wholesale operating income declined to $22.6 million.
Management-reported adjusted Q2 operating income was $32.8 million, with a 15.7% margin, and adjusted diluted EPS was $0.95. These non-GAAP measures exclude specified restructuring, impairment and other items and should be considered alongside GAAP results.
Liquidity, debt and capital
- Cash and cash equivalents were $105.2 million at December 31, 2021, versus $104.6 million at June 30, 2021. Working capital was $93.4 million; the current ratio was 1.42.
- The company had no bank borrowings outstanding and reported $102.2 million of borrowing-base availability under its then-existing $165 million revolving facility. Standby letters of credit totaled $4.0 million.
- Six-month operating cash flow fell to $22.7 million from $65.9 million, primarily reflecting a $45.5 million working-capital use, including increased inventory to support production and lower customer deposits as deliveries rose. Capital expenditures were $3.7 million.
- Cash dividends paid in the first half totaled $25.4 million, including a $0.75-per-share special dividend. The regular quarterly dividend was increased 16% to $0.29 per share. No shares were repurchased during the quarter.
- After quarter-end, on January 26, 2022, the company amended its credit facility: a $125 million revolving line, subject to borrowing-base availability, maturing in January 2027, with an option to increase commitments by up to $60 million.
Material changes, outlook and risks
- Compared with the prior-year quarter, sales, gross margin, operating income, net income and EPS improved, aided by stronger deliveries, a more retail-weighted sales mix, manufacturing/logistics efficiencies and expense control. Prior-year production disruptions also made the comparison easier.
- Q2 included a $3.9 million pre-tax gain from sales of two properties, contributing to a $3.6 million net gain in restructuring and impairment charges. Adjusted results exclude this and other specified items.
- Demand remained strong, but order fulfillment continued to face supply-chain and labor constraints. Backlog was approximately 50% above the prior-year level; it declined during Q2 as production and imports improved. Wholesale backlog was down 12.1% sequentially but remained 47.8% above the prior-year period.
- Management expected near-term gross margins to normalize to approximately 57.0%–57.5% as freight, labor and raw-material costs rise and sales mix moves toward historical levels. It expected fiscal 2022 second-half capital expenditures of $12 million–$14 million and advertising of approximately 3%–4% of sales for the rest of the fiscal year. No specific revenue or EPS guidance was provided.
- Key risks include continuing freight and import delays, rising material and wage costs, shortages of qualified workers, and potential disruption or attrition related to COVID-19 vaccine/testing mandates. Management noted that cost inflation may outpace customer price increases. It stated that available liquidity was expected to cover operations and requirements for at least 12 months.
- The company reported compliance with credit-facility covenants at quarter-end and no material adverse effect expected from existing legal matters. The fixed-charge coverage covenant applies only in specified circumstances when availability falls below a threshold.
Investor facts to verify
- Whether backlog converts to shipments as expected, given persistent fulfillment constraints and elevated order levels.
- Whether margins track management’s 57.0%–57.5% near-term expectation as freight, materials and labor costs evolve.
- Whether operating cash flow improves as inventory investment and customer-deposit balances change.
- How much reported earnings benefited from property-sale gains and how adjusted non-GAAP results reconcile to GAAP.
- Availability, borrowing-base restrictions and covenant triggers under the amended credit facility, as well as the sustainability of dividends.