Ethan Allen Interiors Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2018. Figures are unaudited; dollar amounts are in millions unless noted. Ethan Allen is a vertically integrated home-furnishings designer, manufacturer and retailer, operating wholesale and company-run retail businesses.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $197.2 | $198.5 | $384.9 | $379.8 |
| Gross profit / margin | $108.9 / 55.2% | $107.8 / 54.3% | $210.3 / 54.6% | $208.1 / 54.8% |
| Operating income / margin | $16.1 / 8.2% | $17.5 / 8.8% | $27.9 / 7.3% | $29.1 / 7.7% |
| Net income | $12.2 | $14.9 | $21.0 | $22.3 |
| Diluted EPS | $0.45 | $0.54 | $0.78 | $0.80 |
| Operating cash flow | $7.0 | $(3.5) | $31.5 | $14.2 |
- Quarterly comparison: Sales declined 0.7%; operating income fell 8.0% and net income fell 18.0%. Higher gross profit and margin were more than offset by increased operating expenses and a higher effective tax rate.
- Six-month comparison: Sales rose 1.4%, while operating income declined 4.0% and net income declined 5.6%.
- Segments: Q2 retail segment sales increased 3.6% to $158.5 million and retail operating income improved to $3.3 million from a $0.6 million loss. Wholesale sales declined 8.7% to $107.7 million; wholesale operating income decreased to $8.8 million from $15.6 million. Segment sales include intercompany sales and therefore do not sum to consolidated sales.
- Orders and backlog: Q2 total written orders declined 3.4% and comparable design-center written orders declined 4.2%. Wholesale backlog was down 26.4% year over year; retail backlog was down 14.2%.
- Cash flow and investment: Six-month capital expenditures were $5.0 million, and cash dividends paid were $10.1 million. Operating cash flow improved year over year, mainly reflecting working-capital changes, including inventory movements.
Financial position and liquidity
- At December 31, cash and cash equivalents were $38.8 million, versus $22.4 million at June 30, 2018. Working capital was $82.9 million and the current ratio was 1.59, compared with $93.2 million and 1.77 at June 30.
- Reported debt consisted of $1.3 million in capital leases ($0.5 million current and $0.8 million long-term). The company reported no outstanding floating-rate borrowings under its revolving facility at quarter-end.
- A new five-year secured revolving facility provides up to $165 million, subject to borrowing-base availability, and matures December 21, 2023. Availability was $148.7 million at December 31; $6.2 million of standby letters of credit were outstanding. The company reported covenant compliance.
Management outlook, risks and notable items
- Management described its outlook as “cautiously optimistic,” with continued focus on North American manufacturing, refreshed products, marketing, design-center performance, technology and international expansion. No specific financial guidance was provided.
- Management expects to continue advertising investment during fiscal 2019. Advertising was 12.4% lower year over year in Q2; year-to-date it was 0.8% lower.
- Management attributed international sales weakness, particularly in China and Canada, partly to uncertainty surrounding international trade disputes. Other identified risks include competition, consumer-demand changes, sourcing and raw-material pressures, labor costs, operational or technology disruptions, and tax uncertainty.
- The company declared a $1.00-per-share special dividend and a $0.19-per-share regular quarterly dividend in November, payable in January 2019. Management said future dividends depend on economic conditions and liquidity.
- The company adopted ASC 606 in fiscal Q1; it reported no material effect on revenue amounts or timing, but disclosures changed. The lease standard effective July 1, 2019 is expected to materially affect the balance sheet through right-of-use assets and lease liabilities.
- U.S. tax audits for 2015–2016 were ongoing; management did not anticipate significant changes in uncertain tax impacts over the next twelve months. Routine litigation and environmental matters were disclosed; management did not expect existing matters to have a material adverse effect.
Important facts for investors to verify
- Whether weaker wholesale sales, international demand and written orders persist, and how backlog changes translate into future shipments.
- Whether retail improvement and higher gross margin can offset higher logistics and operating costs.
- How the special dividend and ongoing dividends affect cash, liquidity and capital allocation.
- Borrowing-base availability and compliance with facility terms, particularly if availability approaches the threshold for the fixed-charge coverage covenant.
- The balance-sheet impact of lease accounting adoption and any developments in tax audits or other contingencies.