Ethan Allen Interiors Inc. — Form 10-Q Summary
Business context and period: The filing covers the fiscal second quarter and six months ended December 31, 2017. Ethan Allen is a vertically integrated home-furnishings designer, manufacturer and retailer, operating 148 company design centers alongside independent retailers. Approximately 75% of its products are manufactured in North America.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 | Comparable prior period |
|---|---|---|---|
| Net sales | $198.5 million | $379.8 million | $194.7 million and $388.0 million |
| Gross margin | 54.3% | 54.8% | 55.5% and 55.8% |
| Operating income / margin | $17.5 million / 8.8% | $29.1 million / 7.7% | $17.1 million / 8.8%; $35.4 million / 9.1% |
| Net income | $14.9 million | $22.3 million | $10.7 million and $22.2 million |
| Diluted EPS | $0.54 | $0.80 | $0.38 and $0.79 |
- Second-quarter sales rose 2.0%; wholesale sales increased 3.8%, while retail sales fell 2.1%. Year-to-date sales declined 2.1%, as retail sales fell 4.5% and wholesale sales increased 0.6%.
- Quarterly gross margin declined 1.2 percentage points, partly reflecting a lower retail share of consolidated sales and increased retail promotions. Year-to-date gross margin fell 1.0 point.
- Quarterly net income increased 38.9%, largely because the effective tax rate fell to 16.0% from 36.9%. Year-to-date net income was nearly unchanged despite a lower effective tax rate of 23.5% versus 36.7%, as operating income declined.
- Retail operations posted an operating loss of $0.6 million for the quarter and $3.4 million year to date, versus profits in the comparable periods. Wholesale operating income was $15.5 million for the quarter and $29.0 million year to date.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $14.2 million, down from $27.5 million. Inventory growth used $11.4 million of cash; working-capital items overall used $18.8 million.
- Cash used in investing was $4.3 million, including $5.0 million of capital expenditures. Cash used in financing was $25.6 million, including $14.2 million of debt payments, $10.5 million of dividends and $1.1 million for stock purchases/retirements.
- At December 31, unrestricted cash was $42.0 million, restricted cash and investments were $7.1 million, and total debt was $0.5 million, down from $14.3 million at June 30. The remaining term-loan balance was repaid during the first quarter.
- Working capital was $109.7 million and the current ratio was 1.87. The revolving facility had $114.8 million of availability; the company reported covenant compliance and exemption from its fixed-charge-coverage covenant at period end.
- Inventory increased to $160.8 million from $149.5 million at June 30. Customer deposits declined to $58.6 million from $63.0 million.
Material changes, outlook and risks
- Management attributed operational disruption to adverse weather and hurricanes, first production runs for new products, Department of State furniture orders using manufacturing capacity, holiday downtime and social unrest affecting product flow from Honduras. Production and shipping delays continued into the second quarter; backlogs remained higher than a year earlier.
- Written business declined 5.8% in the quarter and 1.9% year to date; comparable design-center written business fell 6.2% and 2.7%, respectively. Management cited lower retail traffic and weather. It was cautiously optimistic, but provided no specific sales or earnings guidance.
- The December 2017 Tax Act prompted a provisional $2.6 million deferred-tax remeasurement benefit in the quarter. Management expects an effective tax rate of approximately 30% for the remainder of fiscal 2018 and 24%–25% in fiscal 2019; the provisional tax accounting may change as analysis is completed.
- In November, the company declared a $0.50-per-share dividend, including a $0.31 special dividend and a $0.19 regular dividend, payable in January 2018. Management expects to continue dividends as economic conditions and liquidity permit.
- Risks identified include competition and import pricing, changing consumer demand, raw-material availability and costs, manufacturing and logistics concentration, labor pressures, product safety and environmental requirements, cyber disruption, and dependence on consumer credit. The company reported routine litigation and environmental matters, but did not expect existing proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether higher backlogs convert into shipments and sales, and whether manufacturing capacity constraints ease.
- Whether retail sales, written orders and retail-segment profitability recover.
- How inventory growth and working-capital use affect operating cash flow in subsequent periods.
- Final accounting for the Tax Act and the resulting effective tax rate, including the extent of any nonrecurring benefit.
- Dividend affordability and liquidity, particularly given ongoing operating needs and the company’s reliance on revolving-facility availability.