ANNUAL REPORT
6
1
0
2
FINANCIAL
HIGHLIGHTS
STATEMENT OF OPERATIONS DATA
2016
2015
2014
Net sales
$794,202
$754,600
$746,659
Gross profit
$442,236
$411,163
$406,496
Operating income
$89,179
$65,934
$69,636
Net income
$56,637
$37,142
$42,931
PER SHARE DATA
Net income per diluted share
$2.00
$1.27
$1.47
Diluted weighted average
common shares outstanding
BALANCE SHEET DATA
28,324
29,182
29,276
Cash and securities (a)
$60,479
$86,390
$135,836
Working capital
$124,857
$130,012
$169,549
Current ratio
2.01 TO 1
1.92 TO 1
2.25 TO 1
Total assets
$577,409
$605,977
$654,129
Total debt, including
capital lease obligations
$41,838
$76,237
$130,607
Shareholders’ equity
$391,998
$370,258
367,215
Debt as % of equity
10.7%
Debt as % of capital
9.6%
20.6%
17.1%
35.6%
26.2%
CASH RETURNED TO SHAREHOLDERS
Dividends paid
$16,646
$13,348
$11,297
Cost of shares repurchased
$19,346
$16,470
Number of shares repurchased
697,799
645,831
—
—
Amounts in thousands, except share data. Fiscal years ended June 30. Certain reclassifications have been made
to prior years to conform to current year’s presentation of deferred financing fees as a component of debt.
(A) Includes cash and cash equivalents, marketable securities, and restricted cash and investments.
DEAR FELLOW
SHAREHOLDERS
I am pleased to report strong results for fiscal
DIVERSITY OF STYLE
2016. It is clear that many of the initiatives we
have implemented over the past couple of
years are having a meaningful impact on
the growth of our business and enhancing
shareholder returns.
Our net sales for fiscal 2016 of $794.2 million
increased 5.2% over the previous fiscal year.
Operating income of $89.2 million increased
We continued to introduce stylish new products
and projections during fiscal 2016, including
Capitol Hill, Sonoma, and Buckhead. Fiscal
2017 will see the introduction of Santa Monica
in July and Brooklyn in August, followed by
the launch of our Ethan Allen | Disney
collection in the fall. Having the diverse
range of styles our clients want reinforces
determining the need for new product to
$23.3 million or 35.3% with an operating
our position as a design authority.
margin of 11.2%. Net income of $56.6 million
increased 52.5% and earnings per diluted
share of $2.00 increased 57.5%.
CONSISTENT
MARKETING MESSAGES
designing and sourcing that product, to
manufacturing, retailing, and delivering it.
This also makes it possible for us to establish
and deliver on our commitments to
Our strategic focus this past fiscal year, and
We know that consistency builds trust, and
environmental stewardship, sustainability,
as we continue to move forward, is centered
trust creates a positive customer experience,
health and safety, and social responsibility.
on CREATING A POSITIVE CUSTOMER
which is why we have maintained a consistent
New manufacturing technology, combined
EXPERIENCE WITH AN ATTITUDE OF
message of design service, style, quality,
with the talents and depth of knowledge of
REINVENTION through:
● Strong Customer Service
● Diversity of Style
● Consistent Marketing Messages
● Combining Technology
with Personal Service
● Vertical Integration
CUSTOMER EXPERIENCE
With more than 1,500 interior designers in
our global network of 143 company-operated
and 153 independently owned Design
Centers, Ethan Allen is uniquely positioned
to provide interior design service. As we
often tell our clients, “We can help as little
or as much as you’d like.” We have further
empowered our interior designers with new
technology to use to interact with their clients,
and we continue to reposition our Design
Centers close to where our clients live, work,
and shop. During fiscal 2016, we opened
ten new Design Centers, most of which
were relocations. There are more openings
in store for fiscal 2017, including our new
flagship Design Center in the Flatiron District
of Manhattan, opening in August. Our new
locations average less than 10,000 sq. ft.
and incorporate technology to accelerate
the design and selling process, providing a
superior service experience for our clients.
and value. We call them our core messages,
our craftspeople, has made our manufacturing
and they are used across our marketing
mediums, including digital, direct mail,
shelter magazines, print, and television.
These messages reinforce the fact that our
clients have a world of design possibilities
at their fingertips.
COMBINING TECHNOLOGY
WITH PERSONAL SERVICE
Combining technology with personal
service is one of the major differentiators
of great customer service. We are in the
process of creating and refining a dynamic
omnichannel experience for our clients.
We have empowered our designers with
tablets for ready access to information.
We continually add technology to our new
Design Centers in the form of design stations
and large touchscreens where clients can work
on their projects easily, side by side with one
of our talented design professionals. During
fiscal 2016, we made major enhancements to
ethanallen.com. Fiscal 2017 will see even more
functionality improvements and the launch
of our new Ethan Allen | Disney website to
coincide with the product launch in the fall.
division even stronger—the division that is
also the strong base of our stewardship and
responsibility platform. About 70% of our
furniture products are manufactured in our
North American workshops. Eighty percent
of these are custom made and shipped
within four to six weeks; 20% of our furniture
products and more than 60% of our
non-furniture products are available for
immediate delivery. Our Premier In-Home
Delivery, a white-glove delivery service that
we provide at one national price, is a major
competitive advantage. Over the past two
years, we have opened or relocated twelve
retail home delivery service centers to facilitate
this aspect of our business.
The strong results for fiscal 2016 reflect the
focused efforts and accomplishments of all
our talented associates in North America and
elsewhere. I would like to thank all of them,
as well as our clients and shareholders, for
their continued support. We look forward to
an exciting fiscal 2017.
VERTICAL INTEGRATION
Our vertical integration gives us control
over every aspect of our business, from
FAROOQ KATHWARI
Chairman of the Board,
President and CEO
Ethan Allen Interiors Inc.
IN A WORLD WHERE FURNITURE IS GENERALLY MARKETED AS A COMMODITY,
OUTSTANDING PERSONAL SERVICE IS THE NEW LUXURY.
We are as well known for our interior design service as we are for our top-tier products, and our more than 1,500
interior designers and a retail network of nearly 300 Design Centers give us a unique strategic advantage. The experiences that
people see and admire on home decorating shows are experiences they can have with us. We make the full designer experience
accessible in a way no one else can.
Clients seek us out for our knowledge as much as for our quality, and they trust us to back up our promises, because for
decades, they’ve seen us do just that. To build on this bond, drive growth, and further set us apart, we’ve put new technology in
the hands of our designers, helping them to interact with their clients in seamless and more productive ways, and we continue to
reposition our Design Centers close to where our clients live, work, and shop. Our new locations, including an exciting flagship
in Manhattan’s Flatiron District, also incorporate technology to streamline the design and selling process, providing an
experience for our clients that no one else can match.
CUSTOMER
EXPERIENCE
296 DESIGN CENTERS
143 COMPANY OPERATED
153 INDEPENDENTLY OPERATED
2%
CANADA
63%
UNITED STATES
New
Flagship
Design Center
in the Flatiron
District of
Manhattan
35%
INTERNATIONAL
DIVERSITY
OF STYLE
We kicked off a four-phase product and projection
repositioning beginning in fiscal 2015. As of the project’s
completion in August 2016, approximately 70% of our
products are new over the last two years—and these fresh,
new looks are driving traffic and sales. Our diverse range of
styles gives us a broad consumer base, from millennials to
boomers, and reinforces our position as an interior design
authority. And with the exciting new products and interior
design projections in our eagerly anticipated new collaboration
with Disney Consumer Products ready for launch this fall,
we expect to expand that base substantially in fiscal 2017.
RETAIL SALES BY PRODUCT LINE
48%
30%
22%
UPHOLSTERED
PRODUCTS
CASE GOODS
HOME ACCENTS
& OTHER
CONSISTENT
MARKETING
MESSAGES
CONSISTENCY BUILDS TRUST. TRUST CREATES A POSITIVE EXPERIENCE.
Our message isn’t just focused on pricing and sales—that’s a commodity tactic. Our message is consistent nationwide, and will
continue to be: Ethan Allen equals design service, style, quality, and value. We call it our core message, and we broadcast it in every
medium, from direct mail to shelter magazines to print, television, and digital, which we’re more focused on than ever before.
A successful, broad-spectrum plan connects with consumers wherever they are, and ours is one of the best. As we continue to reach the
right audiences in the right way, we take every opportunity to reinforce our core message and build the trust that only consistency can.
TECHNOLOGY PLUS
PERSONAL SERVICE
Ongoing investments in our technology infrastructure created new
efficiencies across our manufacturing, operations, warehousing, retail,
e-commerce, finance, and logistics platforms. By connecting with clients
how and where they want, and delivering the service and information they
need when they need it, we’ve created a dynamic, omnichannel
customer experience with greater engagement and greater retention.
We’re leveraging this to provide a rich branding experience that offers
them not just a sofa or a lamp but design service on demand. Improvements
to our website have measurably boosted e-commerce sales, and soon
we’ll be launching our new Ethan Allen | Disney online experience.
Targeting new and younger, “immediate gratification”-minded
demographics, we have enhanced our online store, streamlining custom
offerings to make the buying process fast and easy, and adding more
in-stock items, creating an opportunity for online sales that augments,
rather than segments, our brick-and-mortar sales.
VERTICAL INTEGRATION
The control we have over every aspect of our business is the
we maintain a uniform focus on standards and on environmental
very foundation of our success. It lets us maintain control of
and social responsibility. We do not operate a commodity-driven,
quality and prices. It means that our commitments to health and
high-inventory, offshore import model; in fact, in fiscal year 2016,
safety, sustainability, environmental stewardship, and social
we exported more products to China than our total imports from
responsibility are built into our organization. And, significantly,
China—a claim our competitors can’t make. We create our own
it gives us the unique opportunity to build a positive customer
advertising, based on a deep, immersive knowledge of our
experience through supply chain efficiency.
audience. We sell our products in our own stores, which are staffed
We design our products in-house and source them ourselves,
with 70% of our furniture manufactured in our North American
workshops. We own and operate seven manufacturing facilities
in the U.S., one in Mexico, and one in Honduras, and at all of them,
by skilled interior design professionals. And we provide Premier
In-Home Delivery service to our clients via our three national
distribution centers and 27 retail division service centers. One
seamless process that starts with an idea and ends with countless
satisfied clients around the world: vertical integration is the key.
Carbon
Footprint
-28%
REDUCED
9,883,179
pounds of CO2e
Electrical
Usage
-8%
REDUCED
3,004,880
kW hours
Recycling
+4%
INCREASED
53,496
pounds
ETHAN ALLEN
METRICS 2015
Water
Usage
-20%
REDUCED
7,180,475
gallons
Greenhouse
Gases
-24%
REDUCED
9,747,875
pounds of CO2e
Landfill Waste
-37%
REDUCED
1,034,940
pounds
Carbon Footprint (CO2e) in pounds per sales dollar manufacturing
2010
2011
2012
2013
2014
2015
.07
.06
.05
.04
.03
.02
.01
0
CONSOLIDATED SALES
& OPERATING MARGIN
Consolidated Net Sales
GAAP Operating Margin
Millions
$680
$700
$720
$740
$760
$780
$800
2016
2015
2014
2013
2012
11.2%
$794.2
$754.6
8.7%
$746.7
9.3%
$729.1
8.3%
$729.4
6.8%
0%
2%
4%
6%
8%
10%
12%
TOTAL SPECIAL & REGULAR
DIVIDENDS PAID
Cash Dividends Paid – Total
Dividend Yield
Millions
$0
$5
$10
$15
$20
$25
2016
2015
2014
2013
2012
$16.6
1.9%
$13.3
1.9%
$11.3
1.6%
1.3%
$22.2
$8.1
0%
.5%
1%
1.5%
1.5%
2%
2.5%
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FORM 10-K
For the fiscal year ended June 30, 2016
OR
[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-11692
Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Delaware
06-1275288
(I.R.S. Employer Identification No.)
Ethan Allen Drive, Danbury, CT
(Address of principal executive offices)
06811
(Zip Code)
Registrant's telephone number, including area code
(203) 743-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Name of Each Exchange On Which Registered
New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ X ] Yes [ ] No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ] Yes [X] No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has
[X] Yes [ ] No
been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or such shorter period that the registrant was required to submit and post such files).
[ ] No
[X] Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
[ X ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act (check one):
Large accelerated filer
Non-accelerated filer
[X]
[ ]
Accelerated filer
Smaller reporting company
[ ]
[ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the Registrant’s common stock, par value $.01 per share, held by non-affiliates (based upon the closing sale
price on the New York Stock Exchange) on December 31, 2015, (the last day of the Registrant’s most recently completed second fiscal
quarter) was approximately $703,752,000. As of July 31, 2016, there were 27,747,128 shares of the Registrant’s common stock, par value
$.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Certain information contained in the Registrant’s definitive Proxy Statement for the 2016
Annual Meeting of stockholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934, is incorporated by reference into Part III hereof.
1
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item
TABLE OF CONTENTS
PART I
Page
1.
1. Business ......................................................................................................................................................................... 3
1A.
Risk Factors ..................................................................................................................................................................... 11
1B. Unresolved Staff Comments ........................................................................................................................................... 15
2.
3.
4.
5.
6.
7.
Properties ........................................................................................................................................................................ 15
Legal Proceedings............................................................................................................................................................ 16
Mine Safety Disclosures .................................................................................................................................................. 17
PART II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ...... 17
Selected Financial Data ................................................................................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operation ............................................. 20
7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................................... 31
8.
9.
Financial Statements and Supplementary Data .............................................................................................................. 32
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .......................................... 57
9A.
Controls and Procedures ................................................................................................................................................. 57
9B. Other Information ........................................................................................................................................................... 58
PART III
10. Directors, Executive Officers and Corporate Governance .............................................................................................. 58
11.
12.
13.
14.
Executive Compensation ................................................................................................................................................. 59
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ...................... 59
Certain Relationships and Related Transactions, and Director Independence ............................................................... 59
Principal Accounting Fees and Services .......................................................................................................................... 59
PART IV
15.
Exhibits and Financial Statement Schedules ................................................................................................................... 59
SIGNATURES............................................................................................................................................................................... 64
2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 1. Business
The Company
PART I
Incorporated in Delaware in 1989, Ethan Allen Interiors Inc., through its wholly-owned subsidiary, Ethan Allen Global, Inc.,
and Ethan Allen Global, Inc.’s subsidiaries (collectively, "We," "Us," "Our," "Ethan Allen" or the "Company"), is a leading
interior design company and manufacturer and retailer of quality home furnishings. Founded over 80 years ago, today we
are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East. We are
vertically integrated from design through delivery, affording our clientele a value equation of style, quality and price that is
unique to the industry. We offer complimentary interior design service to our clients and sell a full range of furniture
products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United
States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail
segment. We own and operate nine manufacturing facilities including six manufacturing plants and one sawmill in the
United States and one manufacturing plant each in Mexico and Honduras.
Available Information
We make available, free of charge via our website, all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and other information filed with, or furnished to, the Securities and Exchange Commission
(the "SEC" or the "Commission"), including exhibits and amendments to such reports. Information contained on our
website is not part of this Annual Report. This information is available at www.ethanallen.com/investors as soon as
reasonably practicable after it is electronically filed with, or furnished to, the SEC. In addition, our SEC filings, including
exhibits filed therewith, are also available on the SEC’s website at www.sec.gov. You may obtain and copy any document
we furnish or file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.
You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office
at 100 F Street, NE, Room 1580, Washington, D.C.
In addition, charters of all committees of our Board of Directors, as well as our Corporate Governance guidelines, are
available on our website at www.ethanallen.com/governance or, upon written request, in printed hardcopy form. Written
requests should be sent to Office of the Secretary, Ethan Allen Interiors Inc., Ethan Allen Drive, Danbury, Connecticut
06811.
Mission Statement
Our primary business objective is to provide our customers with a convenient, full-service, one-stop shopping solution for
their home decorating needs by offering complementary interior design services and stylish, high-quality products at good
value. In order to meet our stated objective, we have developed and adhere to a focused and comprehensive business
strategy. The elements of this strategy, each of which is integral to our solutions-based philosophy, include (i) our vertically
integrated operating structure, (ii) our stylish products and related marketing initiatives, (iii) our retail design center
network, (iv) our people, and (v) our focus on providing interior design solutions.
Operating Segments
Our products are sold through a dedicated global network of approximately 300 retail design centers. As of June 30, 2016, the
Company operated 143 design centers (our retail segment) and our independent retailers operated 153 design centers (as
compared to 144 and 155, respectively, at the end of the prior fiscal year). Our wholesale segment net sales include sales to
our retail segment (which are eliminated in consolidation), and sales to our independent retailers. Our retail segment net
sales accounted for 79% of our consolidated net sales in fiscal 2016. Our wholesale segment net sales to independent retailers
accounted for 21%, including approximately 10.5% of our net sales in fiscal 2016 to the ten largest independent retailers, who
operate 102 design centers. Our independent retailer in China operated 83 of these locations at the end of fiscal 2016.
Our wholesale and retail operating segments represent strategic business areas of our vertically integrated business that
operate separately and provide their own distinctive services (further outlined below). This vertical structure enables us to
offer our complete line of home furnishings and accents more effectively while controlling quality and cost. For certain
3
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
financial information regarding our operating segments, see Note 15 to the Consolidated Financial Statements included
under Item 8 of this Annual Report and incorporated herein by reference.
Our home furnishings and accents are marketed and sold in a similar manner in our wholesale and retail segments,
although the type of customer (wholesale versus retail) and the specific services that each operating segment provides are
different. Within the wholesale segment, we maintain revenue information according to each respective product line (i.e.
case goods, upholstery, or home accents and other). Case goods include items such as beds, dressers, armoires, tables,
chairs, buffets, entertainment units, home office furniture, and wooden accents. Upholstery items include sleepers,
recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather. Skilled
artisans cut, sew and upholster custom-designed upholstery items which are available in a variety of frame, fabric and trim
options. Home accent and other items include window treatments and drapery hardware, wall decor, florals, lighting,
clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden
furnishings.
We evaluate performance of the respective segments based upon revenues and operating income. Inter-segment
transactions result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit
margin.
Wholesale Segment Overview:
Wholesale net sales for each of the last three fiscal years are summarized below (in millions):
Fi s ca l Yea r Ended June 30,
2016
2015
2014
Whol es a l e net s a l es
$
491.5
$
469.4
$
453.6
Wholesale net sales for each of the last three fiscal years, allocated by product line, were as follows:
Ca s e Goods
Uphol s tered Products
Home Accents a nd Other
Fi s ca l Yea r Ended June 30,
2015
34%
48%
18%
2014
36%
48%
16%
2016
32%
51%
17%
100%
100%
100%
The wholesale segment, principally involved in the development of the Ethan Allen brand, encompasses all aspects of
design, manufacture, sourcing, sale, and distribution of our broad range of home furnishings and accents. Wholesale
revenue is generated upon the wholesale sale and shipment of our products to our network of independently operated
design centers and Company operated design centers (see Company operated retail comments below) through its national
distribution center and one other smaller fulfillment center.
During the past year, independent retailers opened 15 new design centers and closed 16, two of which were relocations. We
continue to promote the growth and expansion of our independent retailers through ongoing support in the areas of market
analysis, site selection, and business development. As in the past, our independent retailers are required to enter into license
agreements with us, which (i) authorize the use of certain Ethan Allen trademarks and (ii) require adherence to certain standards
of operation, including a requirement to fulfill related warranty service agreements. We are not subject to any territorial or
exclusive retailer agreements in North America. The wholesale segment also develops and implements related marketing
and brand awareness programs.
Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale net
sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs
associated with wholesale segment activities.
Approximately 75% of the products sold by the Company are manufactured in its North American plants. During fiscal 2016, the
Company’s case goods manufacturing footprint increased 59,000 square feet, further increasing throughput in our
Honduras facility. In our upholstery plants in Maiden, North Carolina we expanded production capacity and built a new R&D
facility. A 300,000 square foot expansion is underway at our upholstery plant in Mexico which we anticipate completing
4
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
during fiscal 2017. We operate four case good plants (two in Vermont including one sawmill, one in North Carolina, and one
in Honduras), four upholstery plants (three at our North Carolina campus, and one in Mexico) and one home accent plant in
New Jersey. We also source selected case goods, upholstery, and home accent items from third-party suppliers
domestically and abroad.
As of June 30, 2016, our wholesale backlog was $40.3 million (as compared to $63.7 million as of June 30, 2015) which is
anticipated to be serviced in the first quarter of fiscal 2017. This backlog fluctuates based on the timing of net orders
booked, manufacturing schedules and efficiency, the timing of sourced product receipts, the timing and volume of
wholesale shipments, and the timing of various promotional events. Because orders may be rescheduled and/or canceled
and the sourcing timing may change, the measure of backlog at a point in time is not necessarily indicative of future sales
performance.
For the twelve months ended June 30, 2016, net orders booked at the wholesale level, which includes orders generated by
independently operated and Company operated design centers, totaled $470.7 million as compared to $487.4 million for
the twelve months ended June 30, 2015. In any given period, net orders booked may be impacted by the timing of floor
sample orders received in connection with new product introductions. New product offerings may be made available to the
retail network at any time during the year, including in connection with our periodic retailer conferences.
Retail Segment Overview:
Retail net sales for each of the last three fiscal years are summarized below (in millions):
Retail net s ales
$
626.5
$
579.7
$
580.7
Fis cal Year Ended June 30,
2016
2015
2014
Retail net sales for each of the last three fiscal years, allocated by product line, were as follows:
Ca s e Goods
Uphol s tered Products
Home Accents a nd Other
Fi s ca l Yea r Ended June 30,
2015
32%
45%
23%
2014
33%
45%
22%
2016
30%
48%
22%
100%
100%
100%
The retail segment sells home furnishings and accents to consumers through a network of Company operated design
centers. The Company also offers access to its products to qualified independent interior designers through our interior design
affiliate (“IDA”) program. Retail revenue is generated upon the retail sale and delivery of our products to our retail
customers through our network of service centers. Retail profitability reflects (i) the retail gross margin, which represents
the difference between the retail net sales price and the cost of goods, purchased primarily from the wholesale segment,
and (ii) other operating costs associated with retail segment activities.
We measure the performance of our design centers based on net sales and written orders booked on a comparable period
basis. Comparable design centers are those which have been operating for at least 15 months. During the first three months of
operations of newly opened (including relocated) design centers, written orders are booked but minimal net sales are achieved
through the delivery of products. Design centers we acquire from independent retailers are included in comparable design
center sales in their 13th full month of Ethan Allen-owned operations. The frequency of our promotional events as well as the
timing of the end of those events can also affect the comparability of orders booked during a given period.
We pursue further expansion of the Company operated retail business by adding interior design professionals and expanding
the IDA program, opening new design centers, relocating existing design centers and, when appropriate, acquiring design
centers from independent retailers. During fiscal 2016 our reach was expanded further through our launch of our gift registry,
and through establishing licensing arrangements with Disney Consumer Products, an affiliate program with the Army and Air
Force Exchange Service and marketing agreements with several leading national real estate brokerages. During fiscal 2016, we
opened ten new design centers, six of which were relocations. The geographic distribution of retail design center locations is
included under Item 2 of Part I of this Annual Report.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Products
Our strategy has been to position Ethan Allen as a preferred brand offering complimentary design service together with
products of superior style, quality and value to provide consumers 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. During fiscal 2016, the Company continued to strengthen its product offerings by introducing new
products to retail consumers in case goods, upholstery, and home accents, by introducing a very large collection of new
products and existing products in new finishes under the umbrella of “Romantic Classics”, “Casual Classics”, and the expansion
of our custom quick-ship program. Much of our furniture is built by hand, one piece at a time, in our North American workshops.
Most frames are hand-assembled and stitching is guided by hand. We select international partners who are as committed to
quality as we are. All case good frames are made with premium lumber and veneers. We use best-in-class construction
techniques, including mortise and tenon joinery and four-corner glued dovetail joinery on drawers. We combine technology
with personal service and maintain an up-to-date broad range of styles and custom options in keeping with today’s home
decorating trends. These factors continue to define Ethan Allen, positioning us as a leader in home fashion.
The interior of our design centers, which were substantially refreshed during the past two fiscal years, are organized to facilitate
display of our product offerings, both in room settings that project the category lifestyle and by product grouping to facilitate
comparisons of the styles and tastes of our clients. To further enhance the experience, technology is used to expand the range
of products viewed by including content from our website in applications used on large touch-screen flat panel displays.
We continuously monitor changes in home fashion trends through attendance at international industry events and fashion
shows, internal market research, and regular communication with our retailers and design center design consultants who
provide valuable input on consumer trends. We believe that the observations and input gathered enable us to incorporate
appropriate style details into our products to react quickly to changing consumer tastes.
Product Development and Sourcing Activities
Using a combination of on staff and outsourced product designers, we design the majority of the products we sell; all of
which are branded Ethan Allen. This important facet of our vertically integrated business enables us to control the design
specifications and establish consistent levels of quality across the products in our own North American plants. To capitalize
on this vertical integration, between the fall of 2014 and the spring of 2016, the Company undertook a significant redesign of
products. Much of the product design took advantage of the Company’s custom manufacturing capabilities in its North
American plants, where we manufacture and/or assemble approximately 75% of the products we sell, making us one of the
largest manufacturers of home furnishings in the United States. Our main manufacturing facilities are located in the Northeast
and Southeast regions of the United States supported by an upholstery plant in Mexico and a case goods plant in Honduras. Our
plants are located near sources of raw materials and skilled artisans. We source approximately 25% of the products we sell
from third-party suppliers, most of which are located outside the United States, primarily in Asia. We carefully select our
sourcing partners and require them to provide products according to our specifications and quality standards. We believe that
strategic investments in our manufacturing facilities balanced with outsourcing from foreign and domestic suppliers will
accommodate significant future sales growth and allow us to maintain an appropriate degree of control over cost, quality and
service to our customers.
We are focused on environmental and social responsibility and incorporating uniform environment, health and safety
programs into our manufacturing standards. Our “green” initiatives include but are not limited to the use of responsibly
harvested Appalachian woods, water based finishes and measuring our carbon footprint, greenhouse gases and recycled
materials from our operations. We have
implemented the Enhancing Furniture’s Environmental Culture (EFEC)
environmental management system sponsored by the American Home Furnishing Alliance (AHFA) at all of our domestic
manufacturing, distribution and service center facilities, and have begun to expand these effort to our retail design centers.
Our domestic manufacturing, distribution and service centers have also achieved Sustainable by Design (SBD) registration
under the EFEC program. Our Silao Mexico facility has also been audited and registered under the AHFA's EFEC program.
SBD provides a framework for home furnishings companies to create and maintain a corporate culture of conservation and
into their
environmental stewardship by
manufacturing operations and sourcing strategies.
integrating socio-economic policies and sustainable business practices
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Raw Materials and Other Suppliers
The most important raw materials we use in furniture manufacturing are lumber, veneers, plywood, hardware, glue,
finishing materials, glass, laminates, fabrics, foam, and filling material. The various types of wood used in our products
include cherry, ash, oak, maple, prima vera, African mahogany, birch, rubber wood and poplar.
Fabrics and other raw materials are purchased both domestically and outside the United States. We have no significant long-
term supply contracts, and have sufficient alternate sources of supply to prevent disruption in supplying our operations. We
maintain a number of sources for our raw materials, which we believe contribute to our ability to obtain competitive pricing.
Lumber prices and availability fluctuate over time based on factors such as weather and demand. The cost of some of our raw
materials such as foam and shipping costs are dependent on petroleum cost. Higher material prices, cost of petroleum, and
costs of sourced products could have an adverse effect on margins.
Appropriate amounts of lumber and fabric inventory are typically stocked to maintain adequate production levels. We
believe that our sources of supply for these materials are sufficient and that we are not dependent on any one supplier.
We enter into standard purchase agreements with certain foreign and domestic suppliers to source selected case goods,
upholstery, and home accent items. The terms of these arrangements are customary for the industry and do not contain
any long-term contractual obligations on our behalf. We believe we maintain good relationships with our suppliers.
Distribution and Logistics
We distribute our products through three distribution centers, owned by the Company, strategically located in New Jersey,
Oklahoma, and Virginia. These distribution centers provide efficient cross-dock operations to receive and ship product from
our manufacturing facilities and third-party suppliers to our network of Company and independently operated retail service
centers. Retail service centers prepare products for delivery into clients’ homes. At June 30, 2016, the Company operated
retail design centers were supported by 13 Company operated retail service centers and 14 service centers operated by
third parties.
While we manufacture to custom order the majority of our products, we also stock selected case goods, upholstery and
home accents to provide for quick delivery of in-stock items and to allow for more efficient production runs. Wholesale
shipments utilize our own fleet of trucks and trailers or are subcontracted with independent carriers. Our fleet of trucks are
financed under capital lease agreements with remaining terms ranging from less than two to over three years, and all of our
trailers are owned.
Our practice has been to sell our products at the same delivered cost to all Company and independently operated design
centers in North America, regardless of their shipping point. This policy creates pricing credibility with our wholesale
customers while providing our retail network the opportunity to achieve more consistent margins by removing fluctuations
attributable to the cost of shipping. Further, this policy eliminates the need for our independent retailers to carry significant
amounts of inventory in their own warehouses. As a result, we obtain more accurate consumer product demand
information.
Marketing Programs
Our marketing and advertising strategies are developed to drive traffic into our network of design centers and to
ethanallen.com. We believe these strategies give Ethan Allen a strong competitive advantage in the home furnishings
industry. We create and coordinate print, digital and television campaigns nationally, as well as assist in international and
local marketing and promotional efforts. The Company’s network of approximately 300 retail design centers, along with the
over 6,000 independent members of the Interior Design Affiliate program, benefit from these marketing efforts, and we
believe these efforts position us to consistently fulfill our brand promise as America's Classic Design Brand.
Our team of advertising specialists creates consistent, clear messages that Ethan Allen is a leader in home fashion, designer
services and classic style, with everything for the well designed home. We use several forms of media to communicate our
message, including social media, digital advertising, television (national and local), direct mail, newspapers and national
shelter magazines. These messages are also conveyed on our website at ethanallen.com. A strong email marketing program
delivers promotional messages, inspiration, design ideas and product brochures to a growing database of clients.
Our national television, social media, online and print advertising campaigns are designed to leverage our strong brand
equity, finding creative and compelling ways to remind consumers of our tremendous range of products, services, special
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
programs, and custom options. Coordinated local digital, television and print advertising also serve to support our national
programs.
The Ethan Allen direct mail magazine, which emphasizes the eclectic mix of our wide breadth of products and services, is a
key marketing tool. We publish these magazines and sell them to Company and independently operated design centers that
use demographic information collected internally and through independent market research to target potential clients.
Given the importance of this advertising medium, direct mail marketing lists are continually refined to target those
consumers who are most likely to purchase, and improve the return on direct mail expenditures. Approximately 23 million
copies of our direct mail magazine were distributed to consumers during fiscal 2016.
At ethanallen.com we provide our clients and our associates with the tools they need to shop, design and buy. The website
features inspiring photography, engaging video content, and all our latest news and promotional information. This year we
launched an enhanced user experience and streamlined the path to purchase by updating the designs to our category
pages, product types, and checkout.
Ethan Allen also has local websites in various international regions to support our international licensees. These websites,
some in local languages, provide a regionalized presentation of the brand while also linking to our main website.
We launched an online specialty store in partnership with the Army and Air Force Exchange Service. The specialty online
store accessible through shopmyexchange.com is an Exchange members-only website. The Army and Air Force Exchange
Service is dedicated to ensuring active and retired soldiers, airmen, and their families have access to U.S. goods and
services, wherever they serve or live.
To enhance the Ethan Allen client experience, our design centers have interactive touchscreens, where users can browse
our full product catalog, check out hundreds of fully designed rooms, print product descriptions, learn about promotions,
and much more. Our design consultants utilize customized tablets so they can be more productive in our design centers and
in our clients’ homes.
Our social media platforms offer fans and followers inspirational images, trend information, and design ideas, as well as tips
for how to bring distinctive Ethan Allen style to their homes. We have a robust and loyal following on Facebook, Pinterest,
Instagram, Twitter, Google+, YouTube, LinkedIn and Houzz. Our products are available to buy on Pinterest where we were
one of the first brands to launch with Pinterest’s buyable pins program.
Our new mover and marketing program with major realtors brings Ethan Allen into targeted homes at the moment
homeowners are most likely in the market for new furnishings. This program educates qualified consumers about our
services and product offerings and is an extension of our designers’ grassroots marketing efforts.
We also have a robust and informative extranet available to our retailers and design professionals. It is the primary source
of communication in and among members of our retail network. It provides information about every aspect of the retail
business at Ethan Allen, including advertising materials, prototype floor plan displays, and extensive product details.
Retail Design Center Network
Ethan Allen design centers are typically located in busy retail settings as freestanding destinations or as part of suburban
strip malls or shopping malls, depending upon the real estate opportunities in a particular market. Our design centers
average approximately 16,000 square feet in size with 75% between 15,000 and 25,000 square feet and 20% less than
15,000 square feet and 5% greater than 25,000 square feet.
Combining technology with personal service in our design centers has allowed us to reduce the size of our design centers.
At June 30, 2016 we operated 19 design centers that have opened in the past three years, and these average 8,700 square
feet. These smaller footprint design centers reflect our direction as we move forward in repositioning our retail design
center network. These new and relocated design centers also reflect our shift from destination and shopping mall locations
to lifestyle centers that better project our brand and offer increased traffic opportunities.
We maintain consistency of presentation throughout the retail design center network through a comprehensive set of
standards and display planning assistance. These interior display design standards assist each design center in presenting a
high quality image by using focused lifestyle settings and select product category groupings to display our products and
information to facilitate design solutions and to educate consumers. We also create a consistent brand projection through our
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
exterior facades and signage. The establishment of these standards has helped position Ethan Allen as a leader in home
furnishings retailing.
We continue to strengthen the retail network with many initiatives, including the opening of new and relocating design
centers in desirable locations, updating presentations and floor plans, strengthening of the professionalism of our designers
through training and certification, and the consolidation of certain design centers and service centers.
People
At June 30, 2016, the Company , through its subsidiaries, had approximately 5,200 employees (“associates”), none of whom are
represented by unions. We believe we maintain good relationships with our employees.
The retail network, which includes both Company subsidiaries and independently operated design centers, is staffed with a
sales force of interior design consultants and service professionals who provide customers with complimentary home
decorating and interior design solutions. Our interior design associates receive specialty training with respect to the
distinctive design and quality features inherent in each of our products and programs. This enables them to more
effectively communicate the elements of style and value that serve to differentiate us from our competition. As such, we
believe our design consultants, and the complimentary service they provide, create a distinct competitive advantage over
other home furnishing retailers. We continue to strengthen the level of service, professionalism, interior design competence,
efficiency, and effectiveness of retail design center associates. The Company’s interior design affiliate program adds further
strength and breadth to our interior design reach. We believe that this program augments the design center design staff to
reach more clients and improve market penetration.
We recognize the importance of our retail design center network to our long-term success. Accordingly, we believe we (i) have
established a strong management team within Company operated design centers and (ii) continue to work closely with our
independent retailers in order to assist them. With this in mind, we make our services available to every design center, whether
independently operated or Company operated, in support of their marketing efforts, including coordinated advertising,
merchandising and display programs, and by providing extensive training seminars and educational materials. We believe that
the development of design consultants, service and delivery personnel, and independent retailers is important for the growth of
our business. As a result, we have committed to make available comprehensive retail training programs intended to increase the
customer service capabilities of each individual.
Customer Service Offerings
We offer numerous customer service programs, each of which has been developed and introduced to consumers in an
effort to make their shopping experience easier and more enjoyable.
Gift Card
This program allows customers to purchase and redeem gift cards through our website or at any participating retail design
center, which can be used for any of our products or services.
Ethan Allen Consumer Credit Programs
The Ethan Allen Platinum program offers consumers (clients) a menu of custom financing options. Financing offered through this
program is administered by a third-party financial institution and is granted to our customers on a non-recourse basis to the
Company. Clients may apply for an Ethan Allen Platinum card at any participating design center or on-line at ethanallen.com.
Competition
The domestic and global home furnishings industry faces numerous challenges, which include an influx of low-priced
products from overseas. As a result, there is a high degree of competition in our markets. We differentiate ourselves as a
preferred brand by adhering to a business strategy focused on providing (i) high-quality, well designed and often custom,
handmade products at good value, (ii) a comprehensive complement of home furnishing design solutions, including our
complimentary design service, and (iii) excellence in customer service. We consider our vertical integration a significant
competitive advantage in the current environment as it allows us to design, manufacture and source, distribute, market,
and sell our products through one of the industry’s largest single-source retail networks.
The internet also provides a highly competitive medium for the sale of a significant amount of home furnishings each year,
and we believe it is becoming increasingly important. Although much of that product is sold through commodity oriented,
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
low priced and low service retailers, we believe consumers are spending more time window shopping on the internet and
are thus better informed when they do visit our brick and mortar facilities. At Ethan Allen, the ultimate goal of our internet
strategy is to drive traffic into our network of design centers by combining technology with excellent personal service. At
ethanallen.com, customers have the opportunity to buy our products online but we take the process further. With so much
of our product offering being custom, we encourage our website customers to get help from our network of interior design
professionals. This complimentary interior design support creates a competitive advantage through our excellent personal
service. This enhances the online experience and regularly leads to internet customers becoming clients of our network of
interior design centers.
Industry globalization has provided us an opportunity to adhere to a blended sourcing strategy, establishing relationships
with certain manufacturers, both domestically and outside the United States, to source selected case goods, upholstery,
and home accent items. We intend to continue to balance our own North American production with opportunities to
source from foreign and domestic manufacturers, as appropriate, in order to maintain our competitive advantage.
We believe the home furnishings industry competes primarily on the basis of product styling and quality, personal service,
prompt delivery, product availability and price. We further believe that we effectively compete on the basis of each of these
factors and that, more specifically, our direct manufacturing, product presentations, website, and complimentary design
service create a distinct competitive advantage, further supporting our mission of providing consumers with a complete
home decorating and design solution. We also believe that we differentiate ourselves further with the quality of our design
service through our intensive training. Our objective is to continue to develop and strengthen our retail network by (i)
expanding the Company operated retail business through the repositioning of and opening of new design centers, and (ii)
obtaining and retaining independent retailers, encouraging such retailers to expand their business through the opening or
relocation of new design centers with the objective of increasing the volume of their sales (iii) further expanding our sales
network through our IDA and realtor referral programs and (iv) further expanding our ecommerce.
Trademarks
We currently hold, or have registration applications pending for, numerous trademarks, service marks and copyrights for
the Ethan Allen name, logos and designs in a broad range of classes for both products and services in the United States and
in many foreign countries. In addition, we have registered, or have applications pending for certain of our slogans utilized in
connection with promoting brand awareness, retail sales and other services and certain collection names. We view such
trademarks and service marks as valuable assets and have an ongoing program to diligently monitor and defend, through
appropriate action, against their unauthorized use.
Executive Officers of the Registrant
Set forth in the table below is a list of our executive officers, together with certain biographical information, including their
ages as of the date of this Report:
M. Farooq Kathwari, age 71
•
Chairman of the Board, President and Chief Executive Officer since 1988
Daniel M. Grow, age 70
Senior Vice President, Business Development since February 2015
•
• Vice-President, Business Development from 2009 to 2015
Eric D. Koster, age 69
• Vice-President, General Counsel and Secretary since April 2013
•
Private practice prior to joining the Company in April 2013
Tracy Paccione, age 50
• Vice-President, Merchandising since June 2009
Clifford Thorn, age 64
• Vice-President, Upholstery Manufacturing since May 2001
Corey Whitely, age 56
•
Executive Vice-President, Administration, Chief Financial Officer and Treasurer since July 2014
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
•
Executive Vice-President, Operations from October 2007 through July 2014
Item 1A. Risk Factors
The following information describes certain significant risks and uncertainties inherent in our business that should be
carefully considered, along with other information contained elsewhere in this Annual Report and in other filings, when
making an investment decision with respect to us. If one or more of these risks actually occurs, the impact on our business,
including our financial condition, results of operations, and cash flows could be adverse.
An economic downturn may materially adversely affect our business.
Our business and results of operations are affected by international, national and regional economic conditions. Regional
economic conditions in the United States and in other regions of the world where we have a concentration of design
centers such as Canada or China may impact the Company greater compared to economic conditions in other parts of the
world where we have lesser concentration of design centers. The United States and many other international economies
experienced a major recession, which reduced the available market size for our industry from historic peak levels. While we
have recalibrated the footprint of our vertically integrated enterprise to be profitable with lower revenues than achieved at
our historic peak, an economic downturn of significance or extended duration could adversely affect consumer demand and
discretionary spending habits and, as a result, our business performance, profitability, and cash flows.
Access to consumer credit could be interrupted and reduce sales and profitability.
Our ability to continue to access consumer credit for our clients could be negatively affected by conditions outside our
control. If capital market conditions were to worsen meaningfully, there is a risk that our business partner that issues our
private label credit card program may not be able to fulfill its obligations under that agreement. In addition, further
tightening of credit markets may restrict the ability and willingness of customers to make purchases.
We may be unable to obtain sufficient external funding to finance our operations and growth.
Historically, we have relied upon our cash from operations to fund our debt service, operations and growth. As we operate
and expand our business, we may rely on external funding sources, including the proceeds from the issuance of additional
debt or use of the $115 million revolving bank line of credit under our existing $150 million credit facility. The credit facility
bears interest at a floating rate and there is a risk that the rate will increase and as we are not hedging our interest rate for
the credit facility, our debt service costs could increase. Any unexpected reduction in cash flow from operations could
increase our external funding requirements to levels above those currently available. There can be no assurance that we
will not experience unexpected cash flow shortfalls in the future or that any increase in external funding required by such
shortfalls will be available on acceptable terms or at all.
Operating losses could reduce our liquidity and impact our dividend policy.
Historically, we have relied on our cash from operations or debt issuances to fund our operations and the payment of cash
dividends. If the Company’s financial performance were to deteriorate resulting in financial losses we may not be able to
fund a shortfall from operations and would require external funding. Some financing instruments used by the Company
historically may not be available to the Company in the future. We cannot assure that additional sources of financing would
be available to the Company on commercially favorable terms should the Company's capital requirements exceed cash
available from operations and existing cash and cash equivalents. In such circumstances, the Company may reduce its
quarterly dividends.
Additional impairment charges could reduce our profitability.
We have significant long-lived tangible and intangible assets recorded on our balance sheets. If our operating results
decline, we may incur impairment charges in the future, which could have a material impact on our financial results. We
evaluate the recoverability of the carrying amount of our long-lived tangible and intangible assets on an ongoing basis.
There can be no assurance that the outcome of such future reviews will not result in substantial impairment charges.
Impairment assessment inherently involves judgments as to assumptions about expected future cash flows and the impact
of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as
to prices, costs or other factors that may result in changes in our estimates of future cash flows. Although we believe the
assumptions we use in testing for impairment are reasonable, significant changes in any of our assumptions could produce
a significantly different result.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
We face changes in global and local economic conditions that may adversely affect consumer demand and spending, our
manufacturing operations or sources of merchandise and international operations.
Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty
regarding future economic prospects. Such uncertainty, as well as other variations in global economic conditions such as
rising fuel costs, wage and benefit inflation, currency fluctuations, and increasing interest rates, may continue to cause
inconsistent and unpredictable consumer spending habits, while increasing our own input costs. These risks, as well as
industrial accidents or work stoppages, could also severely disrupt our manufacturing operations, which could have a
material adverse effect on our financial performance.
We import a portion of our merchandise from foreign countries and operate manufacturing plants in Mexico and Honduras
and operate retail design centers in Canada. As a result, our ability to obtain adequate supplies or to control our costs may
be adversely affected by events affecting international commerce and businesses located outside the United States,
including natural disasters, changes in international trade, central bank actions, changes in the relationship of the U.S.
dollar versus other currencies, labor availability and cost, and other governmental policies of the U.S. and the countries
from which we import our merchandise or in which we operate facilities. The inability to import products from certain
foreign countries or the imposition of significant tariffs could have a material adverse effect on our results of operations.
Competition from overseas manufacturers and domestic retailers may adversely affect our business, operating results or
financial condition.
Our wholesale business segment is involved in the development of our brand, which encompasses the design, manufacture,
sourcing, sales and distribution of our home furnishings products, and competes with other U.S. and foreign manufacturers.
Our retail network sells home furnishings to consumers through a network of Company operated design centers, and
competes against a diverse group of retailers ranging from specialty stores to traditional furniture and department stores,
any of which may operate locally, regionally and nationally, as well as over the internet. We also compete with these and
other retailers for appropriate retail locations as well as for qualified design consultants and management personnel. Such
competition could adversely affect our future financial performance.
Industry globalization has led to increased competitive pressures brought about by the increasing volume of imported
finished goods and components, particularly for case good products, and the development of manufacturing capabilities in
other countries, specifically within Asia. The increase in overseas production capacity has created over-capacity for many
manufacturers, including us, which has led to industry-wide plant consolidation. In addition, because many foreign
manufacturers are able to maintain substantially lower production costs, including the cost of labor and overhead,
imported product may be capable of being sold at a lower price to consumers, which, in turn, could lead to some measure
of further industry-wide price deflation.
We cannot provide assurance that we will be able to establish or maintain relationships with sufficient or appropriate
manufacturers, whether foreign or domestic, to supply us with selected case goods, upholstery and home accent items to
enable us to maintain our competitive advantage. In addition, the emergence of foreign manufacturers has served to
broaden the competitive landscape. Some of these competitors produce furniture types not manufactured by us and may
have greater financial resources available to them or lower costs of operating. This competition could adversely affect our
future financial performance.
Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely
impact our business, operating results and financial condition.
Sales of our products are dependent upon consumer acceptance of our product designs, styles, quality and price. We
continuously monitor changes in home design trends through attendance at international industry events and fashion
shows, internal marketing research, and regular communication with our retailers and design consultants who provide
valuable input on consumer tendencies. However, as with all retailers, our business is susceptible to changes in consumer
tastes and trends. Such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing
consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial
condition.
Our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in
higher transportation costs.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
We have a limited number of manufacturing sites in our case good and upholstery operations, consolidated our distribution
network into fewer centers for both wholesale and retail segments, and operate a single home accents plant. Our
upholstery operations consist of three upholstery plants at our North Carolina campus and one plant in Mexico. The
Company operates three manufacturing plants (North Carolina, Vermont, and Honduras) and one sawmill in support of our
case goods operations. Our plants require various raw materials and commodities such as logs and lumber for our case
good plants and foam, springs and engineered hardwood board for our upholstery plants. As a result of the consolidation of
our manufacturing operations into fewer facilities, if any of our manufacturing or logistics sites experience significant
business interruption, our ability to manufacture products or deliver timely would likely be impacted. While we have long-
standing relationships with multiple outside suppliers of our raw materials and commodities, there can be no assurance of
their ability to fulfill our supply needs on a timely basis. The consolidation to fewer locations has resulted in longer
distances for delivery and could result in higher costs to transport products if fuel costs increase significantly.
Our current and former manufacturing and retail operations and products are subject to increasingly stringent
environmental, health and safety requirements.
We use and generate hazardous substances in our manufacturing and retail operations. In addition, both the manufacturing
properties on which we currently operate and those on which we have ceased operations are and have been used for
industrial purposes. Our manufacturing operations and, to a lesser extent, our retail operations involve risk of personal
injury or death. We are subject to increasingly stringent environmental, health and safety laws and regulations relating to
our products, current and former properties and our current operations. These laws and regulations provide for substantial
fines and criminal sanctions for violations and sometimes require product recalls and/or redesign, the installation of costly
pollution control or safety equipment, or costly changes in operations to limit pollution or decrease the likelihood of
injuries. In addition, we may become subject to potentially material liabilities for the investigation and cleanup of
contaminated properties and to claims alleging personal injury or property damage resulting from exposure to or releases
of hazardous substances or personal injury because of an unsafe workplace.
In addition, noncompliance with, or stricter enforcement of, existing laws and regulations, adoption of more stringent new
laws and regulations, discovery of previously unknown contamination or imposition of new or increased requirements
could require us to incur costs or become the basis of new or increased liabilities that could be material.
Fluctuations in the price, availability and quality of raw materials could result in increased costs or cause production
delays which might result in a decline in sales, either of which could adversely impact our earnings.
We use various types of wood, foam, fibers, fabrics, leathers, and other raw materials in manufacturing our furniture.
Certain of our raw materials, including fabrics, are purchased domestically and outside North America. Fluctuations in the
price, availability and quality of raw materials could result in increased costs or a delay in manufacturing our products,
which in turn could result in a delay in delivering products to our customers. For example, lumber prices fluctuate over time
based on factors such as weather and demand, which in turn, impact availability. Production delays or upward trends in raw
material prices could result in lower sales or margins, thereby adversely impacting our earnings.
In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the
quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products
will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any significant
downturn in the U.S. economy.
We depend on key personnel and could be affected by the loss of their services.
The success of our business depends upon the services of certain senior executives, and in particular, the services of M.
Farooq Kathwari, Chairman of the Board, President and Chief Executive Officer, who is the only one of our senior executives
who operates under a written employment agreement. The loss of any such person or other key personnel could have a
material adverse effect on our business and results of operations.
Our business is sensitive to increasing labor costs, competitive labor markets, our continued ability to retain high-quality
personnel and risks of work stoppages.
The market for qualified employees and personnel in the retail and manufacturing industries is highly competitive. Our
success depends upon our ability to attract, retain and motivate qualified artisans, professional and clerical associates and
upon the continued contributions of these individuals. We cannot provide assurance that we will be successful in attracting
13
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
and retaining qualified personnel. A shortage of qualified personnel may require us to enhance our wage and benefits
package in order to compete effectively in the hiring and retention of qualified employees. Our labor and benefit costs may
continue to increase and such increases may not be recovered. This could have a material adverse effect on our business,
operating results and financial condition.
Our success depends upon our brand, marketing and advertising efforts and pricing strategies. If we are not able to
maintain and enhance our brand, or if we are not successful in these other efforts, our business and operating results
could be adversely affected.
Maintaining and enhancing our brand is critical to our ability to expand our base of customers and may require us to make
substantial investments. Our advertising campaign utilizes television, direct mail, newspapers, magazines and radio to
maintain and enhance our existing brand equity. We cannot provide assurance that our marketing, advertising and other
efforts to promote and maintain awareness of our brand will not require us to incur substantial costs. If these efforts are
unsuccessful or we incur substantial costs in connection with these efforts, our business, operating results and financial
condition could be adversely affected.
We may not be able to maintain our current design center locations at current costs. We may also fail to successfully
select and secure design center locations.
Our design centers are typically located in busy urban settings as freestanding destinations or as part of suburban strip
malls or shopping malls, depending upon the real estate opportunities in a particular market. Our business competes with
other retailers and as a result, our success may be affected by our ability to renew current design center leases and to
select and secure appropriate retail locations for existing and future design centers.
Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.
Sales of furniture and other home furnishing products fluctuate from quarter to quarter due to such factors as changes in
global and regional economic conditions, changes in competitive conditions, changes in production schedules in response
to seasonal changes in energy costs and weather conditions, changes in consumer order patterns, and the timing of various
promotional events. From time to time, we have experienced, and may continue to experience, volatility with respect to
demand for our home furnishing products. Accordingly, results of operations for any quarter are not necessarily indicative
of the results of operations for a full year.
Failure to protect our intellectual property could adversely affect us.
We believe that our copyrights, trademarks, service marks, trade secrets, and all of our other intellectual property are
important to our success. We rely on patent, trademark, copyright and trade secret laws, and confidentiality and restricted
use agreements, to protect our intellectual property and may seek licenses to intellectual property of others. Some of our
intellectual property is not covered by any patent, trademark, or copyright or any applications for the same. We cannot
provide assurance that agreements designed to protect our intellectual property will not be breached, that we will have
adequate remedies for any such breach, or that the efforts we take to protect our proprietary rights will be sufficient or
effective. Any significant impairment of our intellectual property rights or failure to obtain licenses of intellectual property
from third parties could harm our business or our ability to compete. Moreover, we cannot provide assurance that the use
of our technology or proprietary know-how or information does not infringe the intellectual property rights of others. If we
have to litigate to protect or defend any of our rights, such litigation could result in significant expense.
The Company relies heavily on information and technology to operate its business, and any disruption to its technology
infrastructure (including cyber attacks) or the internet could harm the Company's operations.
We operate many aspects of our business including financial reporting, and customer relationship management through
server and web-based technologies, and store various types of data on such servers or with third-parties who in turn store
it on servers and in the “cloud”. Any disruption to the internet or to the Company's or its service providers' global
technology infrastructure, including malware, insecure coding, “Acts of God,” attempts to penetrate networks, data theft or
loss and human error, could have adverse affects on the Company's operations. A cyber attack of our systems or networks
that impairs our information technology systems could disrupt our business operations and result in loss of service to
customers. We have a comprehensive cybersecurity program designed to protect and preserve the integrity of our
information technology systems. We have experienced and expect to continue to experience actual or attempted cyber
attacks of our IT systems or networks; however, none of these actual or attempted cyber attacks has had a material impact
14
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
on our operations or financial condition. Additionally, we have access to sensitive customer information in the ordinary
course of business. If a significant data breach occurred, our reputation may be adversely affected, customer confidence
may be diminished, or we may be subject to legal claims, any of which may contribute to the loss of customers and have a
material adverse impact on our business. While we have invested and continue to invest in information technology risk
management, cybersecurity and disaster recovery plans, these measures cannot fully insulate the Company from
technology disruptions or data theft or loss and the resulting adverse effect on the Company's operations and financial
results.
We could incur substantial costs due to compliance with conflict mineral regulations, which may materially adversely
affect our business, operating results, and financial condition.
The SEC has adopted rules regarding disclosure of the use of tantalum, tin, tungsten, and gold (commonly referred to as
conflict minerals), which are mined from the Democratic Republic of the Congo and surrounding countries. This
requirement could affect the sourcing of materials used in some of our products as well as the companies we use to
manufacture our products. If our products are found to contain conflict minerals sourced from the Democratic Republic of
the Congo or surrounding countries, the Company would take actions such as changing materials or designs to reduce the
possibility that the purchase of conflict minerals may fund armed groups in the region. These actions could add engineering
and other costs to the manufacture of our products.
We expect to incur costs to continue to upgrade our process to discover the origin of the tantalum, tin, tungsten, and gold
used in our products, and to audit our conflict minerals disclosures. Our reputation and consequently our financial
condition may also suffer if we have included conflict minerals originating in the Democratic Republic of the Congo or
surrounding countries in our products, and those conflict minerals funded armed groups in the region.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our 144,000 sq. ft. corporate headquarters, located in Danbury, Connecticut, and adjacent Ethan Allen Hotel and
Conference Center, containing approximately 200 guestrooms, are owned by the Company. The hotel is used primarily for
functions and accommodations for the general public as well as in connection with Ethan Allen functions and training
programs.
We operate nine manufacturing facilities located in the U.S., Mexico and Honduras. All of these facilities are owned by the
Company and include four case good plants (including one sawmill) totaling 1,789,000 square feet, four upholstery
furniture plants totaling 947,000 square feet, and one home accent plant of 177,000 square feet. Our wholesale division
also owns and operates three national distribution and fulfillment centers, one of which shares a facility with our
manufacturing, which are a combined 1,001,000 square feet. Two of our case goods manufacturing facilities are located in
Vermont, one is in North Carolina and one is in Honduras. We have three upholstery manufacturing facilities at our North
Carolina campus, and one in Mexico. Our home accents plant is located in New Jersey, and our distribution facilities are
located in New Jersey, Oklahoma, and Virginia.
We own three and lease ten retail service centers, totaling 732,000 square feet. Our retail service centers are located
throughout the United States and Canada and serve to support our various retail sales districts.
The location activity and geographic distribution of our retail design center network as of June 30, 2016 is as follows:
15
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Yea r-to-da te Fi s ca l 2016
Yea r-to-da te Fi s ca l 2015
Independent
reta i l ers
Compa ny-
opera ted
Tota l
Independent
reta i l ers
Compa ny-
opera ted
Tota l
Reta i l Des i gn Center l oca ti on a cti vi ty:
Ba l a nce a t begi nni ng of peri od
New l oca ti ons
Cl os ures
Tra ns fers
Ba l a nce a t end of peri od
Rel oca ti ons (i n new a nd cl os ures )
Reta i l Des i gn Center geogra phi c l oca ti ons :
Uni ted Sta tes
Ca na da
As i a
Europe
Mi ddl e Ea s t
Tota l
155
15
(16)
(1)
153
2
50
-
94
2
7
153
144
10
(12)
1
143
6
137
6
-
-
-
143
299
25
(28)
-
296
8
187
6
94
2
7
296
152
22
(17)
(2)
155
7
58
2
87
1
7
155
143
4
(5)
2
144
2
137
6
-
1
-
144
295
26
(22)
-
299
9
195
8
87
2
7
299
Of the 143 Company operated retail design centers, 66 of the properties are owned and 77 of the properties are leased
from independent third parties. Of the 66 owned design centers, 17 are subject to land leases. We own six additional retail
properties, two of which are leased to independent Ethan Allen retailers, and four of which are leased to unaffiliated third
parties. See Note 7 to the Consolidated Financial Statements included under Item 8 of this Annual Report for more
information with respect to our operating lease obligations.
We believe that all of our properties are well maintained and in good condition. We estimate that our manufacturing plants
are currently operating at approximately 66% of capacity based on their current shifts and staffing. We believe we have
additional capacity at selected facilities, which we could utilize with minimal additional capital expenditures.
Item 3. Legal Proceedings
In the ordinary course of our business, we are party to various legal proceedings and claims which we believe are incidental
to the operation of our business. Other than as described under Note 13 to our consolidated financial statements included
in Part II, Item 8 of this Annual Report on Form 10-K, we believe the ultimate outcome of these proceedings to which we
are currently a party will not have a material adverse effect on our business, financial position, results of operations or cash
flows.
Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture
finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these
requirements has been facilitated through the introduction of high solids coating technology and alternative formulations.
In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials
to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection
plans and controls, and further development of related inspection/audit teams, all of which have served to reduce
emissions per unit of production. We remain committed to implementing new waste minimization programs and/or
enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated
with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which
serve to minimize emissions and safety risks for employees. In order to reduce the use of hazardous materials in the
manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing
operations and production methods. We believe that our facilities are in material compliance with all such applicable laws
and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.
16
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange (“NYSE”) under ticker symbol "ETH". The following table sets
forth, for each quarterly period during the past two fiscal years, (i) the intraday high and low sales prices of our common
stock as reported on the NYSE and (ii) the dividends per share declared by us:
Fi s ca l 2016
Fi rs t Qua rter
Second Qua rter
Thi rd Qua rter
Fourth Qua rter
Fi s ca l 2015
Fi rs t Qua rter
Second Qua rter
Thi rd Qua rter
Fourth Qua rter
Ma rket Pri ce
Hi gh
Low
Di vi dends
Per Sha re
$
31.87
$
25.76
29.65
32.10
35.31
25.30
22.46
29.39
0.14
0.14
0.17
0.17
$
26.84
$
22.06
$
0.12
31.24
32.63
28.25
22.58
25.31
23.33
0.12
0.12
0.14
Mr. Kathwari, Chief Executive Officer and President, has certified to the NYSE, pursuant to Section 303A.12 of the NYSE’s
Listing Company Manual, that he is unaware of any violation by the Company of the NYSE’s corporate governance listing
standards.
As of July 31, 2016, there were 238 shareholders of record of our common stock. Management estimates there are
approximately 10,000 beneficial shareholders of the Company’s common stock. The Company’s policy is to issue quarterly
dividends, and we expect to continue to declare quarterly dividends for the foreseeable future, business conditions
permitting.
Equity Compensation Plan Information
The Equity Compensation Plan Information required by this Item will appear in the Ethan Allen Interiors Inc. proxy
statement for the Annual Meeting of Shareholders scheduled to be held on November 16, 2016 and is incorporated herein
by reference in the introductory paragraph of Part III of this Annual Report.
Issuer Purchases of Equity Securities
On November 21, 2002, our Board of Directors approved a share repurchase program authorizing us to repurchase up to
2,000,000 shares of our common stock, from time to time, either directly or through agents, in the open market at prices
and on terms satisfactory to us. Subsequent to that date, the Board of Directors increased the aggregate authorization
under the repurchase program on several separate occasions, the last of which was on April 13, 2015 when the Board of
Directors increased the aggregate authorization to approximately 3,000,000 shares. There is no expiration date on the
repurchase authorization and the amount and timing of future share repurchases, if any, will be determined as market and
business conditions warrant. There were no purchases made by or on behalf of us or any affiliated purchaser (as defined in
Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended June 30, 2016.
Comparative Company Performance
The following line graph compares the cumulative total stockholder return for the Company with the S&P 500 Index, and
the S&P Retail Select Industry Index (SPSIRE), assuming $100 was invested on June 30, 2011.
17
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ethan Allen Interiors Inc., the S&P 500® Index,
S&P Retail Select Industry Index (SPSIRE)
$250
$200
$150
$100
$50
$0
6/11
6/12
6/13
6/14
6/15
6/16
Ethan Allen Interiors Inc.
S&P 500®
S&P Retail Select Industry Index (SPSIRE)
*$100 invested on June 30, 2011 in stock or index, including reinvestment of dividends.
Fiscal years ending June 30.
Source: S&P Dow Jones Indices
Item 6. Selected Financial Data
The following table presents selected financial data for the fiscal years ended June 30, 2016, 2015, 2014, 2013 and 2012
that has been derived from our consolidated financial statements (dollar amounts in thousands except per share data). The
information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial
Condition and Results of Operations included under Item 7 of this Annual Report and our Consolidated Financial Statements
(including the notes thereto) included under Item 8 of this Annual Report.
18
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Cons ol i da ted Opera ti ons Da ta
Net Sa l es
Cos t of Sa l es
Sel l i ng, genera l a nd
Fi s ca l Yea r Ended June 30,
2016
2015
2014
2013
2012
$
794,202
$
754,600
$
746,659
$
729,083
$
729,373
351,966
343,437
340,163
330,734
339,085
a dmi ni s tra ti ve expens es
353,057
345,229
336,860
337,912
340,591
Opera ti ng i ncome
Interes t a nd other expens e, net
Income before i ncome
ta x expens e
Income ta x expens e (benefi t)
89,179
1,223
87,956
31,319
65,934
9,251
56,683
19,541
69,636
7,234
62,402
19,471
60,437
10,263
50,174
17,696
49,697
8,458
41,239
(8,455)
Net i ncome
$
56,637
$
37,142
$
42,931
$
32,478
$
49,694
Per Sha re Da ta
Net i ncome per ba s i c
s ha re
Ba s i c wei ghted a vera ge s ha res
outs ta ndi ng
Net i ncome per di l uted
s ha re
Di l uted wei ghted a vera ge
s ha res outs ta ndi ng
$
2.02
$
1.29
$
1.48
$
1.13
$
1.72
28,072
28,874
28,918
28,864
28,824
$
2.00
$
1.27
$
1.47
$
1.11
$
1.71
28,324
29,182
29,276
29,239
29,109
Ca s h di vi dends per s ha re
$
0.62
$
0.50
$
0.40
$
0.77
$
0.30
Other Informa ti on
Depreci a ti on a nd a morti za ti on
Ca pi ta l expendi tures a nd
a cqui s i ti ons
Worki ng ca pi ta l
Current ra ti o
Effecti ve ta x ra te
$
19,353
$
19,142
$
17,930
$
18,008
$
18,581
$
23,132
$
21,778
$
19,305
$
19,775
$
23,404
$
124,857
$
130,012
$
169,582
$
127,631
$
131,715
2.01 to 1
1.92 to 1
2.25 to 1
1.96 to 1
1.87 to 1
35.6%
34.5%
31.2%
35.3%
-20.5%
Ba l a nce Sheet Da ta (a t end of peri od)
Tota l a s s ets
Tota l debt, i ncl udi ng ca pi ta l
l ea s e obl i ga ti ons
Sha rehol ders ' equi ty
Debt a s a percenta ge of equi ty
Debt a s a percenta ge of ca pi ta l
$
577,409
$
605,977
$
654,434
$
617,285
$
644,788
41,838
76,237
130,912
131,289
154,500
$
392,202
$
370,535
$
367,467
$
334,357
$
321,868
10.7%
9.6%
20.6%
17.1%
35.6%
26.3%
39.3%
28.2%
48.0%
32.4%
19
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
The following discussion of financial condition and results of operations is based upon, and should be read in conjunction
with, our Consolidated Financial Statements (including the notes thereto) included under Item 8 of this Annual Report.
Forward-Looking Statements
Management's discussion and analysis of financial condition and results of operations and other sections of this Annual
Report on Form 10-K contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), which represent management’s beliefs and assumptions concerning future events based on
information currently available to us relating to our future results. Such forward-looking statements are identified in this
Annual Report on Form 10-K and in documents incorporated herein by reference by use of forward-looking words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend", “will”, “may”, “continue”, “project”, ”target”, “outlook”,
“forecast”, “guidance”, and similar expressions and the negatives of such forward-looking words. These forward-looking
statements are subject to management decisions and various assumptions about future events, and are not guarantees of
future performance. A number of risks and uncertainties could cause actual results to differ materially from those
anticipated in the forward-looking statements, including, but not limited to: changes in global or regional political or
economic conditions, including changes in governmental and central bank policies; our ability to secure debt or other forms
of financing; the effect of operating losses on our ability to pay cash dividends; changes in business conditions in the
furniture industry, including changes in consumer spending patterns, tastes and demand for home furnishings; competition
from overseas manufacturers and domestic retailers and competitive factors such as changes in products or marketing
efforts of others; effects of our brand awareness and marketing programs, including changes in demand for our existing and
new products; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design
centers or for the expansion of existing design centers; fluctuations in interest rates and the cost, availability and quality of
raw materials; pricing pressures; the effects of labor strikes; weather conditions that may affect sales; volatility in fuel,
utility, transportation and security costs; the potential effects of natural disasters affecting our suppliers or trading
partners; the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; and
those matters discussed in Items 1A and 7A of this Annual Report on Form 10-K and in our other SEC filings. Accordingly,
actual circumstances and results could differ materially from those contemplated by the forward-looking statements.
Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these
statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only
as of the date of this Annual Report on Form 10-K. Other than as required by law, we undertake no obligation to update or
revise forward-looking statements, whether as a result of new information, future events, or otherwise.
Critical Accounting Policies
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles
that require, in some cases, that certain estimates and assumptions be made that affect the amounts and disclosures
reported in those financial statements and the related accompanying notes. Estimates are based on currently known facts
and circumstances, prior experience and other reasonable assumptions. We use our best judgment in valuing these
estimates and may, as warranted, solicit external advice. Actual results could differ from these estimates, assumptions and
judgments, and these differences could be material. The following critical accounting policies, some of which are impacted
significantly by estimates, assumptions and judgments, affect our consolidated financial statements.
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, or market. 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. If actual demand or market conditions in the future are less favorable than
those estimated, additional inventory write-downs may be required.
Revenue Recognition – Revenue is recognized when all of the following have occurred: persuasive evidence of a sales
arrangement exists (e.g. a wholesale purchase order or retail sales invoice); the sales arrangement specifies a fixed or
determinable sales price; title and risk of ownership has passed to the customer; no specific performance obligations
remain; product is shipped or services are provided to the customer; collectability is reasonably assured. As such, revenue
20
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
recognition generally occurs upon the shipment of goods to independent retailers or, in the case of Ethan Allen operated
retail design centers, upon delivery to the customer. If a shipping charge is billed to customers, this is included in revenue.
Recorded sales provide for estimated returns and allowances. We permit our customers to return defective products and
incorrect shipments, and terms we offer are standard for the industry.
Allowance for Doubtful Accounts – We maintain an allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of
specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability
of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those
estimates.
Retail Design Center Acquisitions - We account for the acquisition of retail design centers and related assets with the
purchase method. Accounting for these transactions as purchase business combinations requires the allocation of purchase
price paid to the assets acquired and liabilities assumed based on their fair values as of the date of the acquisition. The
amount paid in excess of the fair value of net assets acquired is accounted for as goodwill.
Impairment of Long-Lived Assets and Goodwill – Goodwill and other indefinite-lived intangible assets are evaluated for
impairment on an annual basis during the fourth quarter of each fiscal year, and between annual tests whenever events or
circumstances indicate that the carrying value of the goodwill or other intangible asset may exceed its fair value. When
testing goodwill for impairment, we may assess qualitative factors for some or all of our reporting units to determine
whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less
than its carrying amount, including goodwill. Alternatively, we may bypass this qualitative assessment for some or all of our
reporting units and determine whether the carrying value exceeds the fair value using a quantitative assessment as
described below.
The recoverability of long-lived assets are evaluated for impairment by determining whether the carrying value will be
recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of
the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the
excess of the asset’s carrying value over its fair value is recorded. The long-term nature of these assets requires the
estimation of cash inflows and outflows several years into the future and only takes into consideration technological
advances known at the time of the impairment test.
To evaluate goodwill using a quantitative assessment, the Company determines the current fair value of the reporting units
using a combination of “Market” and “Income” approaches. 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 are total invested capital (“TIC”) multiples for
revenues and operating cash flows, as well as consideration of control premiums. The TIC multiples are determined based
on public furniture companies within our peer group, and if appropriate, recent comparable transactions are 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 external analyst financial projection
estimates, as well as internal financial projection estimates prepared by management. 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 fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, is valued
using the relief-from-royalty method. Significant factors used in trade name valuation are rates for royalties, future growth,
and a discount factor. Royalty rates are determined using an average of recent comparable values. 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.
In the fourth quarter of fiscal years 2016, 2015 and 2014, the Company performed qualitative assessments of the fair value
of the wholesale reporting unit and concluded that the fair value of its goodwill exceeded its carrying value. The fair value
of the trade name exceeded its carrying value by a substantial margin in fiscal years 2016, 2015, and 2014. To calculate fair
value of these assets, management relies on estimates and assumptions which by their nature have varying degrees of
uncertainty. Wherever possible, management therefore looks for third party transactions to provide the best possible
21
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
support for the assumptions incorporated. Management considers several factors to be significant when estimating fair
value including expected financial outlook of the business, changes in the Company’s stock price, the impact of changing
market conditions on financial performance and expected future cash flows, and other factors. Deterioration in any of these
factors may result in a lower fair value assessment, which could lead to impairment of the long-lived assets and goodwill of
the Company.
Income Taxes – Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the 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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. Additional factors that we consider
when making judgments about the deferred tax valuation include tax law changes, a recent history of cumulative losses,
and variances in future projected profitability.
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. We recognize interest and penalties related to income tax matters as a component of
income tax expense.
Business Insurance Reserves – We have insurance programs in place to cover workers’ compensation and property/casualty
claims. 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.
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.
Other Loss Reserves – We have a number of other potential loss exposures incurred in the ordinary course of business such
as environmental claims, product liability, litigation, tax liabilities, restructuring charges, and the recoverability of deferred
income tax benefits. Establishing loss reserves for these matters requires the use of estimates and judgment with regard to
maximum risk exposure and ultimate liability or realization. As a result, these estimates are often developed with our
counsel, or other appropriate advisors, and are based on our current understanding of the underlying facts and
circumstances. Because of uncertainties related to the ultimate outcome of these issues or the possibilities of changes in
the underlying facts and circumstances, additional charges related to these issues could be required in the future.
Results of Operations
A summary of our consolidated operations for the past three fiscal years are presented in the following table ($ in millions).
Fi s ca l yea rs ended June 30,
Net s a l es
Gros s profi t
SG&A
Opera ti ng i ncome
Net i ncome
Ea rni ngs per di l uted s ha re
Net ca s h provi ded by opera ti ng a cti vi ti es
2016
$
794.2
442.2
353.1
89.2
56.6
2.00
58.4
$
$
%
100.0%
55.7%
44.5%
11.2%
7.1%
%
100.0%
54.5%
45.7%
8.7%
4.9%
$
2015
754.6
411.2
345.2
65.9
37.1
1.27
55.1
$
$
%
100.0%
54.4%
45.1%
9.3%
5.7%
$
2014
746.7
406.5
336.9
69.6
42.9
1.47
59.9
$
$
A summary of changes from the preceeding fiscal year are presented in the following table.
22
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Net s a l es
Opera ti ng i ncome
Net i ncome
Ea rni ngs per di l uted s ha re
Net ca s h provi ded by opera ti ng a cti vi ti es
Fi s ca l yea rs ended June 30,
2016
2015
2014
5.2%
35.3%
52.5%
57.5%
5.9%
1.1%
-5.3%
-13.5%
-13.6%
-8.0%
2.4%
15.2%
32.2%
32.4%
-2.3%
Beginning in the fall of 2014, we began a major transformation of our product offerings with several phases. We introduced
Casual Classics during the first phase in the fall of 2014, focusing on several design projections with relaxed finishes and
comfort. In the spring and summer of 2015, we launched the second phase, Romantic Classics, with design projections
featuring unique, stand-alone timeless pieces with new finishes and forms, designed specifically for manufacturing primarily
at our North American workshops to obtain maximum benefit from our vertical integration. We launched the third phase in
the fall of 2015, during which we further developed Romantic Classics, inspired by European designs, taking inspiration
from the classics and modernizing them for today’s living, with continued focus on North American manufacturing. In our
current phase, we continue to differentiate our brand by further expanding our Casual Classics, with three new design
projections; Buckhead, featuring designs infused with European inspiration and Southern charm, introduced in June 2016;
Santa Monica, a blend of breezy beach house and vintage farmhouse flair, introduced in July 2016; and Brooklyn, a
sophisticated industrial design, expected to be introduced in August 2016. These new product offerings will be followed by
the introduction of our Ethan Allen | Disney home line in the fall of 2016. While we implement major product introductions,
such as the anticipated introductions described above, our wholesale segment experiences some disruptions in
manufacturing as we change tooling and methods, build prototypes and then ramp up production. In our retail segment,
some disruption also occurs in our design centers as we update floor displays, and sell the remainder of our older products
on clearance to make space for the new product. Our continuous product transformation in measured steps helps us
minimize these disruptions and preserve our reputation for offering high-quality and fashionable products.
For the year ended June 30, 2016, our net sales increased from the prior fiscal year at a higher rate than in the previous two
fiscal years, as our new introductions and marketing efforts gain traction with consumers. Operating expenses during fiscal
2016 decreased as a percentage of sales in fiscal 2016 compared to fiscal 2015, further contributing to a fiscal 2016 net
income increase of 52.5% over the prior fiscal year and earnings per diluted share of $2.00. Net cash provided by operating
activities along with operating cash enabled us to repurchase $19.3 million of our common stock under our share
repurchase program, pay down $31.5 million of our debt earlier than scheduled, and return $16.6 million in cash dividends
to our shareholders. At June 30, 2016 we had total cash and securities of $60.5 million, and working capital of $124.9
million.
The components of consolidated revenues and operating income (loss) by business segment are as follows (in millions):
Revenue:
Whol es a l e s egment
Reta i l s egment
El i mi na ti on of i nter-s egment s a l es
Fi s ca l Yea r Ended June 30,
2016
2015
2014
$
491.5
$
469.4
$
453.6
626.5
(323.8)
579.7
(294.5)
580.7
(287.6)
Cons ol i da ted revenue
$
794.2
$
754.6
$
746.7
Operating income :
Whol es a l e s egment
Reta i l s egment
Adjus tment for i nter-compa ny profi t (1)
$
74.4
$
67.0
$
57.8
16.5
(1.7)
1.7
(2.8)
10.5
1.3
Cons ol i da ted opera ti ng i ncome
$
89.2
$
65.9
$
69.6
23
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(1) Represents the change in wholesale profit contained in Ethan Allen operated design center inventory existing at the
end of the period.
A summary by business segment of annual percentage changes from the preceeding fiscal years are presented in the
following tables.
Whol es a l e s egment
Revenue
Opera ti ng Income
Ba ckl og
Reta i l s egment
Fi s ca l Yea r Ended June 30,
2015
2016
2014
4.7%
11.1%
-36.8%
3.5%
15.9%
41.8%
4.4%
13.7%
-6.5%
Fi s ca l Yea r Ended June 30,
2015
2016
2014
Revenue
Compa ra bl e des i gn center revenue
Tota l wri tten orders
Compa ra bl e des i gn center wri tten orders
Opera ti ng Income
Ba ckl og
8.1%
8.5%
1.7%
1.8%
853.1%
-13.1%
-0.2%
0.7%
3.9%
4.4%
-83.6%
18.6%
0.4%
3.0%
1.0%
3.0%
31.2%
-4.7%
The fiscal 2016 decreases in backlogs of 36.8% for wholesale and 13.1% for retail followed backlog increases at the end of
fiscal 2015. In June 2015 a price increase effective July 1, 2015 was announced which created a spike in June 2015 orders
for both wholesale and retail, in advance of the price increase, increasing the fiscal 2015 ending backlogs. There was no
corresponding price increase announced at the end of fiscal 2016.
Operating income in the retail segment in fiscal 2016 increased 853.1% compared to fiscal 2015 primarily due to a $46.8
million increase in revenue in fiscal 2016, and net gains on the sale of real estate in fiscal 2016 compared to net losses in
fiscal 2015.
We continue to make investments to strengthen the level of service, professionalism, interior design competence,
efficiency, and effectiveness of the retail network design center personnel. We believe that over time, we will continue to
benefit from (i) continuous repositioning and opening of new design centers in our retail network, (ii) frequent new product
introductions, (iii) new and innovative marketing promotions and effective use of targeted advertising media, and (iv)
continued use of the latest technology coupled with personal service from our interior design professionals. We believe our
network of professionally trained interior design professionals differentiates us significantly from others in our industry.
Our manufacturing operations gained efficiency by increasing throughput in our Honduras facility, and expanding capacity
and building a new R&D facility in North Carolina. We estimate our manufacturing facilities are currently operating at
approximately 66% of capacity based on their current shifts and staffing. We believe we have sufficient scalable capacity
that can support strong sales growth while maintaining control over cost, quality and service to our customers.
Business Results:
Our revenues are comprised of (i) wholesale sales to independently operated and Company operated retail design centers
and (ii) retail sales of Company operated design centers. See Note 15 to our Consolidated Financial Statements for the year
ended June 30, 2016 included under Item 8 of this Annual Report.
Fiscal 2016 Compared to Fiscal 2015
Consolidated revenue for the fiscal year ended June 30, 2016 was $794.2 million compared to $754.6 million for fiscal
2015. There was year-over-year sales growth in both the wholesale and retail segments.
Wholesale revenue for fiscal 2016 increased by $22.1 million, or 4.7%, to $491.5 million from $469.4 million in the prior
fiscal year. The year-over-year increase was attributable to increased sales to our Company operated design centers and
domestic independent retailers, partly offset by a decrease to our international independent design centers, primarily in
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
China. There were 296 design centers globally as of June 30, 2016, a decrease by three from June 30, 2015. There was a net
decrease of two independently operated retail network locations, which included a decrease of eight legacy locations in the
U.S., bringing the total U.S. independent total to 50, and a net increase of eight new locations in China, bringing the China
total to 83. Our international net sales to independent retailers was 5.4% of our consolidated net sales for the fiscal year
ended June 30, 2016 compared to 7.5% the previous fiscal year.
Retail revenue from Ethan Allen operated design centers for the twelve months ended June 30, 2016 increased by $46.8
million, or 8.1%, to $626.5 million from $579.7 million for the twelve months ended June 30, 2015. Comparable store
revenue increased 8.5%. Year-over-year, written orders for the Company operated design centers increased 1.7% and
comparable design centers written orders increased 1.8%. A higher increase in net sales relative to written orders is
reflected in the 13.1% decrease in ending backlog at June 30 2016.
Gross profit for fiscal 2016 increased to $442.2 million from $411.2 million in fiscal 2015. The $31.1 million increase in gross
profit was attributable to increases in both our retail and wholesale segment net sales, as well as a higher mix of retail net
sales to consolidated net sales in fiscal 2016 of 78.9% compared to the 76.8% in the prior fiscal year.
Operating expenses increased $7.8 million or 2.3% to $353.1 million or 44.5% of net sales in fiscal 2016 from $345.2 million
or 45.7% of net sales in fiscal 2015. The increase in fiscal year 2016 expenses in absolute dollars is primarily due to
increased variable costs associated with our increased sales in both business segments. As a percentage of net sales,
expenses decreased during fiscal 2016 as compared to fiscal 2015 primarily due to gains associated with the disposal of real
estate in fiscal 2016 compared to expenses in the prior fiscal year.
Operating income for the fiscal year ended June 30, 2016 totaled $89.2 million, or 11.2% of net sales, compared to $65.9
million, or 8.7% of net sales, in the prior fiscal year. Wholesale operating income for fiscal 2016 totaled $74.4 million, or
15.1% of net sales, as compared to $67.0 million, or 14.3% of net sales, in the prior year. Retail operating income was $16.5
million, or 2.6% of sales, for fiscal 2016, compared to $1.7 million, or 0.3% of sales, for fiscal 2015, an increase of $14.7
million. The increase in consolidated operating income was primarily attributable to increased net sales, and the net impact
of real estate dispositions on both fiscal years as previously discussed.
Interest and other income, net was $0.4 million in fiscal 2016 compared to an expense of $3.3 million in fiscal 2015. The
prior fiscal year included a loss on the early extinguishment of our Senior Notes in the quarter ended March 31, 2015 of
$3.7 million, which consisted of a $3.5 million “make whole” payment, and the write-off of unamortized balances of original
issue discount, deferred financing fees and derivative instruments.
Interest and other related financing costs decreased $4.3 million to $1.6 million from $5.9 million in the prior fiscal year.
The decrease is primarily due to lower interest expense throughout fiscal 2016 due to early extinguishment of our Senior
Notes in the quarter ended March 31, 2015, as well as further debt repayments during fiscal 2016.
Income tax expense was $31.3 million for fiscal 2016 and $19.5 million for fiscal 2015. Our effective tax rate for fiscal 2016
was 35.6% compared to 34.5% in fiscal 2015. The effective tax rate for both fiscal years primarily includes tax expense on
that fiscal year’s net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and
recognition of some uncertain tax positions.
Net income for fiscal 2016 was $56.6 million as compared to $37.1 million in fiscal 2015. Net income per diluted share
totaled $2.00 in fiscal 2016 compared to $1.27 per diluted share in the prior fiscal year.
Fiscal 2015 Compared to Fiscal 2014
Consolidated revenue for the fiscal year ended June 30, 2015 was $754.6 million compared to $746.7 million for fiscal
2014. There was year-over-year sales growth in the wholesale segment and a slight decline in the retail segment. The
increase in the wholesale segment in fiscal 2015 was primarily due to higher shipments internationally and to our retail
segment.
Wholesale revenue for fiscal 2015 increased by $15.8 million, or 3.5%, to $469.4 million from $453.6 million in fiscal 2014.
The year-over-year increase was attributable to increased sales to both our Company operated design centers and
independent retailers worldwide. Orders similarly increased 7.7% during the same period. The number of total design
centers globally as of June 30, 2015 was 299, which increased by four from June 30, 2014. The independently operated
retail network, net of relocations, increased by three design centers to 155 at June 30, 2015 including a net increase of five
25
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
locations to 75 in China. Our international net sales to independent retailers was 7.5% of our consolidated net sales for the
fiscal year ended June 30, 2015 compared to 6.5% the for the year ended June 30, 2014.
Retail revenue from Ethan Allen operated design centers for the twelve months ended June 30, 2015 decreased by $1.0
million, or 0.2%, to $579.7 million from $580.7 million for the twelve months ended June 30, 2014. Year-over-year, written
orders for the Company operated design centers increased 3.9% and comparable design centers written business increased
4.4% Net sales were impacted by the increased level of clearance sales during fiscal 2015 as compared to fiscal 2014. The
strengthening of the U.S. dollar to the Canadian dollar and euro resulted in an average decrease in sales of 0.5% due to the
seven to eight design centers we operated in Canada and Europe throughout the fiscal year. The increase in written orders
is reflected in the 18.6% increase in ending backlog at June 30, 2015.
Gross profit for fiscal 2015 increased to $411.2 million from $406.5 million in fiscal 2014. The $4.7 million increase in gross
profit was primarily attributable to increases in our wholesale segment of both manufacturing efficiency and net sales. This
was partly offset by a lower mix of retail net sales to consolidated net sales in fiscal 2015 of 76.8% compared to the 77.8%
in fiscal 2014, and a net increase in cost of goods sold due to the elimination of intercompany profit in ending inventory.
Operating expenses increased $8.4 million or 2.5% to $345.2 million or 45.7% of net sales in fiscal 2015 from $336.9 million
or 45.1% of net sales in fiscal 2014. The increase in fiscal 2015 expenses is primarily due to costs associated with
strengthening our management team in the retail segment, increased maintenance and repair costs and depreciation
expense associated with our retail design center refurbishing efforts undertaken during fiscal 2015 and increased expense
associated with the disposal of real estate, due to our continual repositioning of the retail network.
Operating income for the fiscal year ended June 30, 2015 totaled $65.9 million, or 8.7% of net sales, compared to $69.6
million, or 9.3% of net sales, in fiscal 2014. Wholesale operating income for fiscal 2015 totaled $67.0 million, or 14.3% of
net sales, as compared to $57.8 million, or 12.7% of net sales, in fiscal 2014. Retail operating income was $1.7 million, or
0.3% of sales, for fiscal 2015, compared to $10.5 million, or 1.8% of sales, for fiscal 2014, a decrease of $8.8 million. The
reduction in consolidated operating income was primarily attributable to increased operating expenses in our retail
segment and increased clearance sales as previously discussed, and an increase in the intercompany profit in ending
inventory, partly offset by increases in our wholesale segment due to efficiency and volume.
Interest and other income, net was an expense of $3.3 million in fiscal 2015 compared to income of $0.3 million in fiscal
2014. Fiscal 2015 included a loss on the early extinguishment of our Senior Notes in the quarter ended March 31, 2015 of
$3.7 million, which consisted of a $3.5 million “make whole” payment, and the write-off of unamortized balances of original
issue discount, deferred financing fees and derivative instruments.
Interest and other related financing costs decreased $1.6 million to $5.9 million from $7.5 million in fiscal 2014. The
decrease is primarily due to lower interest expense throughout fiscal 2015, from lower debt due to the Senior Note
repurchases during fiscal 2014 and the early extinguishment of our Senior Notes in the quarter ended March 31, 2015.
Income tax expense was $19.5 million for both fiscal 2015 and fiscal 2014. Our effective tax rate for fiscal 2015 was 34.5%
compared to 31.2% in fiscal 2014. The fiscal 2015 effective tax rate includes tax expense on income, and the recognition of
certain previously unrecognized tax benefits, partly offset by recording tax and interest expense on additional uncertain tax
positions. The fiscal 2014 effective tax rate includes tax expense on income, the benefit from the reversal of valuation
allowances against certain deferred tax assets in the retail segment, and the recognition of certain previously unrecognized
tax benefits, partially offset by tax and interest expense on additional uncertain tax positions.
Net income for fiscal 2015 was $37.1 million as compared to $42.9 million in fiscal 2014. Net income per diluted share
totaled $1.27 in fiscal 2015 compared to $1.47 per diluted share in fiscal 2014.
Liquidity and Capital Resources
At June 30, 2016, we held unrestricted cash and equivalents of $52.7 million and restricted cash and investments of $7.8
million. At June 30, 2015, we held unrestricted cash and cash equivalents of $76.2 million, marketable securities of $2.2
million, and restricted cash and investments of $8.0 million. During fiscal 2016 we used cash to pay down a portion of our
debt and for common share repurchases. Our principal sources of liquidity include cash and cash equivalents, marketable
securities, cash flow from operations, amounts available under our credit facility, and other borrowings.
26
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
In September 2005, we issued $200 million in ten-year senior unsecured notes due October 1, 2015 (the "Senior Notes").
The Company entered into a five year, $150 million senior secured revolving credit and term loan facility on October 21,
2014, as amended (the “Facility”). The Facility, which expires on October 21, 2019, provides a term loan of up to $35 million
and a revolving credit line of up to $115 million, subject to borrowing base availability. During March 2015, we utilized $35
million of the term loan and $40 million of the revolving credit line, along with our available cash to fully redeem our Senior
Notes. We incurred financing costs of $1.5 million under the Facility, which are being amortized by the interest method,
over the remaining life of the Facility.
At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual
rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 1.75%, or (b) the higher of (i) the prime rate, (ii)
the federal funds effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 0.75%. At June 30, 2016 the
annual interest rate in effect on the revolving loan was 2.0%.
At the Company’s option, term loans under the Facility bear interest, based on the Company’s rent adjusted leverage ratio,
at an annual rate of either (a) LIBOR plus 1.75% to 2.25%, or (b) the higher of (i) the prime rate, (ii) the federal funds
effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.75% to 1.25%. At June 30, 2016 the annual interest rate
in effect on the term loan was 2.25%.
The Company pays a commitment fee of 0.15% to 0.25% per annum on the unused portion of the Facility, and fees on
issued letters of credit at an annual rate of 1.5% to 1.75% based on the average availability. Certain payments are restricted
if the availability under the revolving credit line falls below 20% of the total revolving credit line, and the Company is
subject to pro forma compliance with the fixed charge coverage ratio if applicable.
Quarterly installments of principal on the term loan are payable based on a straight line 15-year amortization period, with
the balance due at maturity. The Company does not expect to repay the revolving credit line portion of the Facility within
the next year.
The Facility is secured by all property owned, leased or operated by the Company in the United States and includes certain
real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur
debt; engage in mergers and consolidations; make restricted payments (including dividends and share repurchases); sell
certain assets; and make investments.
The Company must maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 at all times. If the outstanding term loans
are less than $17.5 million and the fixed charge coverage ratio equals or exceeds 1.25 to 1.0, the fixed charge coverage ratio
ceases to apply and thereafter is only triggered if average monthly availability is less than 15% of the amount of the
revolving credit line. During November 2015, we made a $16.5 million prepayment on the term loan, bringing the
outstanding term loan to $17.3 million, and the fixed charge coverage ratio ceased to apply. Our subsequent average
availability exceeded 65%, such that the fixed charge coverage ratio did not apply.
The Company intends to use the Facility for working capital and general corporate purposes, including dividend payments
and share repurchases, in addition to the refinancing of our Senior Notes which occurred in March 2015. At both June 30,
2016 and June 30, 2015, there was $0.2 million of standby letters of credit outstanding under the Facility. Total availability
under the Facility was $89.8 million at June 30, 2016 and $74.8 million at June 30, 2015. The increase in availability was due
to $15.0 million payments we made on the revolving loan during fiscal 2016.
At both June 30, 2016 and June 30, 2015, we were in compliance with all covenants of the Senior Notes and the credit
facilities.
A summary of net cash provided by (used in) operating, investing, and financing activities for each of the last three fiscal
years is provided below (in millions):
27
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Ca s h provi ded by (us ed i n) opera ti ng a cti vi ti es
Net i ncome pl us depreci a ti on a nd a morti za ti on
Worki ng ca pi ta l i tems
Other opera ti ng a cti vi ti es
Fi s ca l Yea rs Ended June 30,
2016
2014
2015
$
76.0
(19.3)
$
56.3
(15.2)
$
60.9
(2.1)
1.7
14.0
1.1
Tota l provi ded by opera ti ng a cti vi ti es
$
58.4
$
55.1
$
59.9
Ca s h provi ded by (us ed i n) i nves ti ng a cti vi ti es
Ca pi ta l expendi tures & a cqui s i ti ons
Net s a l es (purcha s es ) of ma rketa bl e s ecuri ti es
Other i nves ti ng a cti vi ti es
$
(23.1)
2.2
8.4
$
(21.8)
15.4
9.8
$
(19.3)
(3.4)
10.6
Tota l provi ded (us ed) i n i nves ti ng a cti vi ti es
$
(12.5)
$
3.4
$
(12.1)
Ca s h provi ded by (us ed i n) fi na nci ng a cti vi ti es
Pa yments of l ong-term debt a nd ca pi ta l l ea s e obl i ga ti ons
Borrowi ngs from revol vi ng credi t a nd term l oa n fa ci l i ti es
Purcha s es a nd reti rements of compa ny s tock
Pa yment of ca s h di vi dends
Other fi na nci ng a cti vi ti es
Tota l us ed i n fi na nci ng a cti vi ti es
$
(34.8)
-
(19.3)
(16.6)
1.6
$
(133.7)
75.0
(17.6)
(13.3)
(1.4)
$
(0.5)
-
-
(11.3)
0.5
$
(69.1)
$
(91.0)
$
(11.3)
Cash Provided By (Used in) Operating Activities
In fiscal 2016 cash of $58.4 million was provided by operating activities, an increase of $3.3 million from $55.1 million in the
prior year comparable period. This was largely due to an increase in net income in fiscal 2016. This was partly offset by net
decreases in other operating activities of $12.3 million and cash used for working capital in the ordinary course of business
of $4.1 million (defined below). Net income plus depreciation and amortization in the prior fiscal year includes a $3.7
million expense for the early redemption of our Senior Notes. Of this amount, $3.5 million is offset as a positive in other
operating activities, as this is considered a financing activity and not an operating activity. Other operating activities
changed primarily due to net gains on the sale of real estate in the current year compared to net losses in the prior year.
These are deducted from net income to arrive at cash from operating activities. Working capital items consist of current
assets (accounts receivable, inventories, prepaid and other current assets) less current liabilities (customer deposits,
payables, and accrued expenses and other current liabilities).
Cash Provided By (Used in) Investing Activities
In fiscal 2016, cash of $12.5 million was used in investing activities, an increase in cash used of $16.0 million from $3.4
million which was provided by during the prior year comparable period. More cash was used during fiscal 2016 primarily
due to decreases in net sales of marketable securities in the current fiscal year. There were also less proceeds from the sale
of real estate in fiscal 2016 than in the prior fiscal year, although the gains on sale were greater in fiscal 2016 than in the
prior fiscal year, and increased current fiscal year capital expenditures. We anticipate that cash from operations will be
sufficient to fund future capital expenditures.
Cash Provided By (Used in) Financing Activities
In fiscal 2016, $69.1 million was used in financing activities, a decrease of $21.8 million from $91.0 million in the prior year
comparable period. This was primarily due to the early redemption of our Senior Notes in March 2015. The Senior Notes
had a face value of $129.4 million, which we redeemed by paying $54.4 million with available cash, and $75 million with
borrowings under the Facility. We also paid a $3.5 million prepayment premium to bondholders as stipulated in the original
bond indenture. During fiscal 2016 we made a $16.5 million prepayment on the term loan, a $15 million payment on our
revolver, $3.3 million in scheduled payments on debt and capital leases, and utilized $19.3 million to repurchase 697,799
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
shares at a weighted average cost of $27.72 per share. At June 30, 2016 we have remaining Board authorization to
repurchase 1.8 million shares. Cash dividends paid per share increased from $0.10 to $0.12 in October 2014, $0.14 in July
2015, and $0.17 in April 2016, resulting in an increase in payments during fiscal 2016 of 24.7%. We expect to continue to
declare quarterly dividends for the foreseeable future, business conditions permitting.
Our total debt obligations at June 30, 2016 consist of the following (in millions):
Revol vi ng Credi t Fa ci l i ty due 10/21/2019
$
25.0
Term Loa n due 10/21/2019
Ca pi ta l l ea s es
Una morti zed debt i s s ua nce cos ts
Tota l debt
Les s current ma turi ti es
Tota l l ong-term
16.2
1.5
(0.9)
41.8
3.0
$
38.8
The following table summarizes, as of June 30, 2016, the timing of cash payments related to our outstanding contractual
obligations (in millions):
Long-term debt obl i ga ti ons :
Debt ma turi ti es
Contra ctua l i nteres t
Opera ti ng l ea s e obl i ga ti ons
Letters of credi t
Purcha s e obl i ga ti ons (1)
Other l ong-term l i a bi l i ti es
Les s
tha n 1
Yea r
Tota l
1-3
Yea rs
4-5
Yea rs
More
tha n 5
Yea rs
$
41.8
$
3.0
$
4.7
$
34.1
$
-
2.7
215.4
0.2
-
0.2
0.9
33.9
0.2
-
-
1.6
60.7
-
-
-
0.2
46.5
-
-
0.0
-
74.3
-
-
0.2
Tota l contra ctua l obl i ga ti ons
$
260.3
$
37.9
$
67.0
$
80.9
$
74.5
(1) For purposes of this table, purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant
terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the
transaction. While we are not a party to any significant long-term supply contracts or purchase commitments, 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, 2016, our open purchase orders with respect to such goods and services totaled approximately $31
million.
Further discussion of our contractual obligations associated with outstanding debt and lease arrangements can be found in
Notes 6 and 7, respectively, to the Consolidated Financial Statements included under Item 8 of this Annual Report.
We believe that our cash flow from operations, together with our other available sources of liquidity, will be adequate to
make all required payments of principal and interest on our debt, to permit anticipated capital expenditures, and to fund
working capital and other cash requirements. As of June 30, 2016, we had working capital of $124.9 million compared to
$130.0 million at June 30, 2015, a decrease of $5.2 million and a current ratio of 2.0 to 1 at June 30, 2016 and 1.9 to 1 at
June 30, 2015. In addition to using available cash to fund changes in working capital, necessary capital expenditures,
acquisition activity, the repayment of debt, and the payment of dividends, the Company has been authorized by our board
of directors to repurchase our common stock, from time to time, either directly or through agents, in the open market at
prices and on terms satisfactory to us.
Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations
Except as indicated below, we do not utilize or employ any off-balance sheet arrangements, including special-purpose
entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative
29
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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. The only such program
in place at both June 30, 2016 and June 30, 2015 was for our consumer credit program described below.
Ethan Allen Consumer Credit Program
The terms and conditions of our consumer credit program, which is financed and administered by a third-party financial
institution on a non-recourse basis to Ethan Allen, are set forth in an agreement between the Company and that financial
service provider (the “Program Agreement”) which was last amended effective January 2014. Any independent retailer
choosing to participate in the consumer credit program is required to enter into a separate agreement with that same third-
party financial institution which sets forth the terms and conditions under which the retailer is to perform in connection
with its offering of consumer credit to its customers (the “Retailer Agreement”). We have obligated ourselves on behalf of
any independent retailer choosing to participate in our consumer credit program by agreeing, in the event of default,
breach, or failure of the independent retailer to perform under such Retailer Agreement, to take on certain responsibilities
of the independent retailer, including, but not limited to, delivery of goods and reimbursement of customer deposits.
Customer receivables originated by independent retailers remain non-recourse to Ethan Allen. The Program Agreement will
terminate on July 31, 2019, but includes a provision for automatic one-year renewals unless either party gives notice of
termination. While the maximum potential amount of future payments (undiscounted) that we could be required to make
under this obligation is indeterminable, recourse provisions exist that would enable us to recover, from the independent
retailer, any amount paid or incurred by us related to our performance. Based on the underlying creditworthiness of our
independent retailers, including their historical ability to satisfactorily perform in connection with the terms of our
consumer credit program, we believe this obligation will expire without requiring funding by us. To ensure funding for
delivery of products sold, the terms of the Program Agreement also contain a right for the financial services provider to
demand from the Company collateral at a variable rate based on the volume of program sales if the Company does not
meet certain covenants. At June 30 of 2016 and 2015, no collateral was required under the Program Agreement.
Product Warranties
Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that
extend from three to seven years and are provided based on terms that are generally accepted in the industry. All of 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. As of June 30, 2016 and 2015, the Company’s
product warranty liability totaled $1.2 million and $1.0 million, respectively.
Impact of Inflation
We believe inflation had an impact on our business the last three fiscal years but we have generally been able to create
operational efficiencies, seek lower cost alternatives, or raise selling prices in order to offset increases in product and
operating costs. It is possible in the future that we will not be successful in our efforts to offset the impacts from inflation.
Business Outlook
We continue to strengthen our vertically integrated structure from concept of idea, to engineering, to manufacturing, to
retail and logistics. On the manufacturing side, our objective is to maintain strong manufacturing capabilities in North
America, which we believe is a long-term competitive advantage that will allow us to advance our objectives of maintaining
short order times, exceptional quality and improving capacity to ship custom made to order items more quickly, which in
30
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
turn will allow us to grow our business. In September 2015, the Company announced the planned doubling of its upholstery
manufacturing facility in Mexico. The expansion has begun and is expected to be completed within the next two years.
Beginning in fiscal 2014, we have been undergoing a major transformation of our product offerings, which is intended to
refresh over 70% of our products with the completion of the most current phase during the summer through fall of 2016.
We believe that we are well positioned to leverage all the actions we have taken.
We expect the home furnishings industry to remain extremely competitive with respect to both the sourcing of products
and the wholesale and retail sale of those products for the foreseeable future. Domestic manufacturers continue to face
pricing pressures because of the lower manufacturing costs in some other countries, particularly within Asia. While we also
utilize overseas sourcing for approximately one quarter of our products, we choose to differentiate ourselves by
maintaining a substantial North American manufacturing base, where we can leverage our vertically integrated structure to
our advantage. We continue to believe that a balanced approach to product sourcing, which includes our own North
American manufacturing of about 75% of our product offerings coupled with the import of other selected products,
provides the greatest degree of flexibility and is the most effective approach to ensuring that acceptable levels of quality,
service and value are attained.
We therefore remain cautiously optimistic about our performance due to the many strong programs already in place and
others we currently plan to introduce in the coming months. Our retail strategy involves (i) a continued focus on providing
new product introductions, a wide array of product solutions, and superior interior design solutions through our large staff
of interior design professionals, (ii) continuing strong advertising and marketing campaigns to get our message across and
to continue broadening our customer base, (iii) the opening of new or relocated design centers in more prominent
locations, and encouraging independent retailers to do the same, (iv) leveraging the use of technology and personal service
within our retail network and online through www.ethanallen.com, and (v) further expansion internationally. We believe
this strategy provides an opportunity to grow our business. Further discussion of the home furnishings industry has been
included under Item 1 of this Annual Report.
Where You Can Find Other Information
Our website is www.ethanallen.com. Information contained on our website is not part of this Annual Report on Form 10-K.
Information that we furnish or file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-
Q, Current Reports on Form 8-K and any amendments to, or exhibits included in, these reports are available for download,
free of charge, on our website soon after such reports are filed with or furnished to the SEC. Our SEC filings, including
exhibits filed therewith, are also available on the SEC’s website at www.sec.gov. You may obtain and copy any document
we furnish or file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330.
You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office
at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
Recent Accounting Pronouncements
See Note 1 to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates.
Interest rate risk exists primarily through our borrowing activities. We utilize United States dollar denominated borrowings
to fund substantially all our working capital and investment needs. Short-term debt, if required, is used to meet working
capital requirements and long-term debt is generally used to finance long-term investments. There is inherent rollover risk
for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and our future financing requirements.
For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but
would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate
obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings
or cash flows. At June 30, 2016, we had $41.2 million of floating-rate debt obligations outstanding under our Facility. We
currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future.
31
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Based on the average interest rate of the loans under the Facility during the quarter ended June 30, 2016, and to the extent
that borrowings were outstanding, a 10% change in the interest rate would not have a material effect on our consolidated
results of operations and financial condition.
Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in
Canada, one distribution center in Belgium, and our plants in Mexico and Honduras, as substantially all purchases of
imported parts and finished goods are denominated in United States dollars. As such, gains or losses resulting from market
changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our
consolidated results of operations. A decrease in the value of foreign currencies (in particular Asian) relative to the United
States dollar may affect the profitability of our vendors but as we employ a balanced sourcing strategy, we believe any
impact would be moderate relative to peers in the industry.
Item 8. Financial Statements and Supplementary Data
Our Consolidated Financial Statements and Supplementary Data are listed in Item 15 of this Annual Report.
32
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Ethan Allen Interiors Inc.:
We have audited the accompanying consolidated balance sheets of Ethan Allen Interiors Inc. and subsidiaries (the
Company) as of June 30, 2016 and 2015, and the related consolidated statements of comprehensive income, shareholders’
equity, and cash flows for each of the years in the three-year period ended June 30, 2016. We also have audited the
Company’s internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Ethan Allen Interiors Inc. and subsidiaries as of June 30, 2016 and 2015, and the results of its operations and its
cash flows for each of the years in the three-year period ended June 30, 2016, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, Ethan Allen Interiors Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of June 30, 2016, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) .
/s/ KPMG LLP
August 8, 2016
33
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2016 and 2015
(In thousands, except share data)
2016
2015
ASSETS
Current a s s ets :
Ca s h a nd ca s h equi va l ents
Ma rketa bl e s ecuri ti es
Accounts recei va bl e, l es s a l l owa nce for doubtful a ccounts of
$1,639 a t June 30, 2016 a nd $1,386 a t June 30, 2015
Inventori es
Prepa i d expens es a nd other current a s s ets
$
Tota l current a s s ets
Property, pl a nt a nd equi pment, net
Goodwi l l a nd other i nta ngi bl e a s s ets
Res tri cted ca s h a nd i nves tments
Other a s s ets
Tota l a s s ets
LIABILITIES AND SHAREHOLDERS' EQUITY
Current l i a bi l i ti es :
Current ma turi ti es of l ong-term debt
Cus tomer depos i ts
Accounts pa ya bl e
Accrued compens a ti on a nd benefi ts
Accrued expens es a nd other current l i a bi l i ti es
Tota l current l i a bi l i ti es
Long-term debt
Other l ong-term l i a bi l i ti es
Tota l l i a bi l i ti es
Sha rehol ders ' equi ty:
52,659
-
9,467
162,323
23,755
248,204
273,615
45,128
7,820
2,642
$
76,182
2,198
12,547
151,916
27,831
270,674
277,035
45,128
8,010
5,130
$
577,409
$
605,977
$
3,001
60,958
15,437
22,067
21,884
$
3,034
67,970
18,946
26,896
23,816
123,347
38,837
23,023
185,207
489
-
140,662
73,203
21,577
235,442
489
-
Cl a s s A common s tock, pa r va l ue $0.01; 150,000,000 s ha res
a uthori zed; 48,921,544 s ha res i s s ued a t June 30, 2016 a nd
48,884,5866 s ha res i s s ued a t June 30, 2015
Cl a s s B common s tock, pa r va l ue $0.01; 600,000 s ha res
a uthori zed; none i s s ued
Addi ti ona l pa i d-i n-ca pi ta l
374,972
370,914
Les s : Trea s ury s tock (a t cos t), 21,175,416 s ha res a t June 30, 2016 a nd
20,477,617 s ha res a t June 30, 2015
Reta i ned ea rni ngs
Accumul a ted other comprehens i ve i ncome
Tota l Etha n Al l en Interi ors Inc. s ha rehol ders ' equi ty
Noncontrol l i ng i nteres ts
Tota l s ha rehol ders ' equi ty
(624,932)
646,315
(4,846)
391,998
204
392,202
(605,586)
607,079
(2,638)
370,258
277
370,535
Tota l l i a bi l i ti es a nd s ha rehol ders ' equi ty
$
577,409
$
605,977
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For Years Ended June 30, 2016, 2015, and 2014
(In thousands, except share data)
Net s a l es
Cos t of s a l es
Gros s profi t
Sel l i ng, genera l a nd a dmi ni s tra ti ve expens es
Opera ti ng i ncome
Interes t a nd other i ncome (expens e)
Interes t a nd other rel a ted fi na nci ng cos ts
Income before i ncome ta xes
Income ta x expens e
Net i ncome
Per s ha re da ta :
2016
2015
2014
$
794,202
351,966
442,236
353,057
89,179
395
1,618
87,956
31,319
$
754,600
343,437
411,163
345,229
65,934
(3,333)
5,918
56,683
19,541
$
746,659
340,163
406,496
336,860
69,636
276
7,510
62,402
19,471
$
56,637
$
37,142
$
42,931
Net i ncome per ba s i c s ha re
$
2.02
$
1.29
$
1.48
Ba s i c wei ghted a vera ge common s ha res
28,072
28,874
28,918
Net i ncome per di l uted s ha re
$
2.00
$
1.27
$
1.47
Di l uted wei ghted a vera ge common s ha res
28,324
29,182
29,276
Di vi dends decl a red per common s ha re
$
0.62
$
0.50
$
0.40
Comprehens i ve i ncome:
Net i ncome
Other comprehens i ve i ncome
Curency tra ns l a ti on a djus tment
Other
Other comprehens i ve i ncome (l os s ) net of ta x
$
56,637
$
37,142
$
42,931
(2,208)
27
(2,181)
(3,308)
78
(3,230)
(77)
105
28
Comprehens i ve i ncome
$
54,456
$
33,912
$
42,959
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Years Ended June 30, 2016, 2015, and 2014
(In thousands)
Operating activities:
Net i ncome
Adjus tments to reconci l e net i ncome to net
ca s h provi ded by opera ti ng a cti vi ti es :
Depreci a ti on a nd a morti za ti on
Compens a ti on expens e rel a ted to s ha re-ba s ed pa yment a wa
Provi s i on (benefi t) for deferred i ncome ta xes
Res tructuri ng a nd i mpa i rment cha rge
Los s (ga i n) on di s pos a l of property, pl a nt a nd equi pment
Other
Cha nge i n opera ti ng a s s ets a nd l i a bi l i ti es , net of
effects of a cqui red bus i nes s es :
Accounts recei va bl e
Inventori es
Prepa i d a nd other current a s s ets
Cus tomer depos i ts
Accounts pa ya bl e
Accrued expens es a nd other current l i a bi l i ti es
Other a s s ets a nd l i a bi l i ti es
Net ca s h provi ded by opera ti ng a cti vi ti es
Investing activities:
Proceeds from the di s pos a l of property, pl a nt & equi pment
Cha nge i n res tri cted ca s h a nd i nves tments
Ca pi ta l expendi tures
Acqui s i ti ons
Purcha s es of ma rketa bl e s ecuri ti es
Sa l es of ma rketa bl e s ecuri ti es
Other i nves ti ng a cti vi ti es
Net ca s h provi ded by (us ed i n) i nves ti ng a cti vi ti es
Financing activities:
Borrowi ngs from revol vi ng credi t a nd term l oa n fa ci l i ti es
Pa yments on l ong-term debt a nd ca pi ta l l ea s e obl i ga ti ons
Purcha s es a nd reti rements of compa ny s tock
Pa yment of ca s h di vi dends
Other fi na nci ng a cti vi ti es
Net ca s h us ed i n fi na nci ng a cti vi ti es
Effect of excha nge ra te cha nges on ca s h
Net i ncrea s e (decrea s e) i n ca s h & ca s h equi va l ents
Ca s h & ca s h equi va l ents - begi nni ng of yea r
2016
2015
2014
$
56,637
$
37,142
$
42,931
19,353
2,356
671
-
(2,267)
(1,295)
2,926
(9,982)
5,113
(7,275)
(3,509)
(6,550)
2,191
58,369
8,073
190
(22,967)
(165)
-
2,150
193
(12,526)
-
(34,840)
(19,346)
(16,646)
1,718
(69,114)
(252)
(23,523)
76,182
19,142
1,236
3,923
784
4,180
3,606
(559)
(5,036)
(9,628)
7,517
(5,349)
(2,113)
261
55,106
9,103
497
(19,787)
(1,991)
-
15,430
176
3,428
75,000
(133,710)
(17,552)
(13,348)
(1,353)
(90,963)
(565)
(32,994)
109,176
17,930
1,325
(3,032)
-
2,093
415
(149)
(9,019)
4,269
586
1,300
969
271
59,889
3,381
6,926
(19,305)
-
(18,268)
14,883
325
(12,058)
-
(480)
-
(11,297)
525
(11,252)
(4)
36,575
72,601
Ca s h & ca s h equi va l ents - end of yea r
$
52,659
$
76,182
$
109,176
Suppl ementa l ca s h fl ow i nforma ti on:
Income ta xes pa i d
Interes t pa i d
Non-ca s h ca pi ta l l ea s e obl i ga ti ons i ncurred
$
29,003
1,352
$
-
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
36
$
18,250
7,181
1,700
$
$
20,928
7,085
$
-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For Years Ended June 30, 2016, 2015, and 2014
(In thousands, except share data)
Common
Stock
Addi ti ona l
Pa i d-i n
Ca pi ta l
Tre a s ury
Stock
Accumul a te d
Othe r
Compre he ns i ve
I ncome
Re ta i ne d
Ea rni ngs
Non-
Control l i ng
I nte re s ts
Tota l
Ba l a nce a t June 30, 2013
$
486
$
363,938
$
(584,041)
$
684
$
553,083
$
207
$
334,357
Stock i s s ue d on s ha re -ba s e d a wa rds
Compe ns a ti on e xpe ns e a s s oci a te d wi th
s ha re -ba s e d a wa rds
Ta x be ne fi t a s s oci a te d wi th e xe rci s e of
s ha re ba s e d a wa rds
Di vi de nds de cl a re d on common s tock
Ca pi ta l di s tri buti on
Compre he ns i ve i ncome (l os s )
Ba l a nce a t June 30, 2014
Stock i s s ue d on s ha re -ba s e d a wa rds
Compe ns a ti on e xpe ns e a s s oci a te d wi th
s ha re -ba s e d a wa rds
Ta x be ne fi t a s s oci a te d wi th e xe rci s e of
s ha re ba s e d a wa rds
Purcha s e /re ti re me nt of compa ny s tock
Di vi de nds de cl a re d on common s tock
Ca pi ta l di s tri buti on
Compre he ns i ve i ncome (l os s )
Ba l a nce a t June 30, 2015
Stock i s s ue d on s ha re -ba s e d a wa rds
Compe ns a ti on e xpe ns e a s s oci a te d wi th
s ha re -ba s e d a wa rds
Ta x be ne fi t a s s oci a te d wi th e xe rci s e of
s ha re ba s e d a wa rds
Purcha s e /re ti re me nt of compa ny s tock
Di vi de nds de cl a re d on common s tock
Ca pi ta l di s tri buti on
Compre he ns i ve i ncome (l os s )
Ba l a nce a t June 30, 2016
-
-
-
-
-
-
486
3
-
-
-
-
-
-
489
-
-
357
1,325
113
-
-
-
365,733
4,117
1,236
(172)
-
-
-
-
370,914
734
2,356
-
-
-
-
-
-
(584,041)
-
-
-
(21,545)
-
-
-
(605,586)
-
-
-
-
-
-
-
(42)
642
-
-
-
-
-
-
(3,280)
(2,638)
-
-
-
-
-
(11,619)
-
42,931
584,395
-
-
-
-
(14,458)
-
37,142
607,079
-
-
-
-
-
-
(25)
70
252
-
-
-
-
-
(25)
50
277
-
-
357
1,325
113
(11,619)
(25)
42,959
367,467
4,120
1,236
(172)
(21,545)
(14,458)
(25)
33,912
370,535
734
2,356
-
-
-
-
-
489
$
968
-
-
-
-
374,972
$
-
(19,346)
-
-
-
(624,932)
$
-
-
-
-
(2,208)
(4,846)
$
-
-
(17,401)
-
56,637
646,315
$
-
-
-
(100)
27
204
$
968
(19,346)
(17,401)
(100)
54,456
392,202
$
Se e a ccompa nyi ng note s to cons ol i da te d fi na nci a l s ta te me nts .
37
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2016, 2015 and 2014
(1)
Summary of Significant Accounting Policies
Basis of Presentation
The following is a summary of significant accounting policies of Ethan Allen Interiors Inc., and its wholly-owned subsidiaries
(collectively "We," "Us," "Our," "Ethan Allen" or the "Company"). All significant intercompany accounts and transactions have
been eliminated in the consolidated financial statements. Our consolidated financial statements also include the accounts of an
entity in which we are a majority shareholder with the power to direct the activites that most significantly impact the entity’s
performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statement of
Comprehensive Income within interest and other income, net.
On April 7, 2015 the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard
classifies debt issuance costs as a deduction from the debt liability, consistent with debt discounts. Prior to the issuance of
ASU 2015-03, these costs were classified as assets. We adopted the provisions of ASU 2015-03 beginning in July 2015 and
prior period amounts have been reclassified to conform to the current period presentation. As of June 30, 2015, $0.3
million of debt issuance costs were reclassified in the consolidated balance sheet from other noncurrent assets to current
portion of long-term debt and $1.0 million was reclassified from other noncurrent assets to long-term debt, less current
portion. The adoption of ASU 2015-03 did not impact our consolidated statements of comprehensive income, or our
consolidated statements of cash flows.
Nature of Operations
We are a leading manufacturer and retailer of quality home furnishings and accents, offering complimentary interior design
service to our clients and sell a full range of furniture products and decorative accents. We sell our products through one of
the country’s largest home furnishing retail networks and at June 30, 2016 there were a total of 296 retail design centers, of
which 143 are Company operated and 153 are independently operated. Nearly all of our Company operated retail design centers
are located in the United States, with the remaining Company operated design centers located in Canada. The majority of the
independently operated design centers are in Asia, with the remaining independently operated design centers located throughout
the United States, the Middle East and Europe. We have nine manufacturing facilities, one of which includes a separate sawmill
operation, located throughout the United States, and one plant each in Mexico and Honduras.
Use of Estimates
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United
States, which requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Because of the inherent uncertainty involved in
making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been
made include, but are not limited to, revenue recognition, the allowance for doubtful accounts receivable, inventory
obsolescence, tax valuation allowances, useful lives for property, plant and equipment and definite lived intangible assets,
goodwill and indefinite lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair
value of assets acquired and liabilities assumed in business combinations.
Reclassifications
Certain reclassifications have been made to prior years’ financial statements in order to conform to the current year’s
presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported
results.
Cash Equivalents
Cash and short-term, highly liquid investments with original maturities of three months or less are considered cash and cash
equivalents. We invest excess cash in money market accounts, short-term commercial paper, and U.S. Treasury Bills.
38
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market. 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).
Marketable Securities
The Company’s investments are classified at the time of purchase as either available-for-sale or held-to-maturity, and
reassessed as of each balance sheet date. Our marketable securities consist of available-for-sale securities, and are marked-
to-market based on prices provided by our investment advisors, with unrealized gains and temporary unrealized losses
reported as a component of other comprehensive income net of tax, until realized. When realized, the Company recognizes
gains and losses on the sales of the securities on a specific identification method and includes the realized gains or losses in
other income, net, in the consolidated statements of operations. The Company includes interest, dividends, and
amortization of premium or discount on securities classified as available-for-sale in other income, net in the consolidated
statements of operations. We also evaluate our available-for-sale securities to determine whether a decline in fair value of
a security below the amortized cost basis is other than temporary. Should the decline be considered other than temporary,
we write down the cost of the security and include the loss in earnings. In making this determination we consider such
factors as the reason for and significance of the decline, current economic conditions, the length of time for which there
has been an unrealized loss, the time to maturity, and other relevant information. Available-for-sale securities are classified
as either short-term or long-term based on management’s intention of when to sell the securities.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation of plant and
equipment is provided over the estimated useful lives of the respective assets on a straight-line basis. Estimated useful lives of the
respective assets typically range from twenty to forty years for buildings and improvements and from three to twenty years for
machinery and equipment. Leasehold improvements are amortized based on the underlying lease term, or the asset’s estimated
useful life, whichever is shorter.
Operating Leases
We record expense for operating leases by recognizing the minimum lease payments on a straight-line basis, beginning on
the date that the lessee takes possession or control of the property. A number of our operating lease agreements contain
provisions for tenant improvement allowances, rent holidays, rent concessions, and/or rent escalations.
Incentive payments received from landlords are recorded as deferred lease incentives and are amortized over the
underlying lease term on a straight-line basis as a reduction of rent expense. When the terms of an operating lease provide
for periods of free rent, rent concessions, and/or rent escalations, we establish a deferred rent liability for the difference
between the scheduled rent payment and the straight-line rent expense recognized. This deferred rent liability is also
amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.
Retail Design Center Acquisitions
We account for the acquisition of retail design centers and related assets with the purchase method. Accounting for these
transactions as purchase business combinations requires the allocation of purchase price paid to the assets acquired and
liabilities assumed based on their fair values as of the date of the acquisition. The amount paid in excess of the fair value of net
assets acquired is accounted for as goodwill.
Goodwill and Other Intangible Assets
Our intangible assets are comprised primarily of goodwill, which represents the excess of cost over the fair value of net
assets acquired, and trademarks. We determined these assets have indefinite useful lives, and are therefore not amortized.
Impairment of Long-Lived Assets and Goodwill
Goodwill and other indefinite-lived intangible assets are evaluated for impairment on an annual basis during the fourth
quarter of each fiscal year, and between annual tests whenever events or circumstances indicate that the carrying value of
the goodwill or other intangible asset may exceed its fair value. When testing goodwill for impairment, we may assess
qualitative factors for some or all of our reporting units to determine whether it is more likely than not (that is, a likelihood
of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill.
39
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Alternatively, we may bypass this qualitative assessment for some or all of our reporting units and determine whether the
carrying value exceeds the fair value using a quantitative assessment as described below.
The recoverability of long-lived assets are evaluated for impairment by determining whether the carrying value will be
recovered through the expected undiscounted future cash flows resulting from the use of the asset. In the event the sum of
the expected undiscounted future cash flows is less than the carrying value of the asset, an impairment loss equal to the
excess of the asset’s carrying value over its fair value is recorded. The long-term nature of these assets requires the
estimation of cash inflows and outflows several years into the future and only takes into consideration technological
advances known at the time of the impairment test.
To evaluate goodwill using a quantitative assessment, the Company determines the current fair value of the reporting units
using a combination of “Market” and “Income” approaches. 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 are total invested capital (“TIC”) multiples for
revenues and operating cash flows, as well as consideration of control premiums. The TIC multiples are determined based
on public furniture companies within our peer group, and if appropriate, recent comparable transactions are 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 external analyst financial projection
estimates, as well as internal financial projection estimates prepared by management. 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 fair value of our trade name, which is the Company’s only indefinite-lived intangible asset other than goodwill, is valued
using the relief-from-royalty method. Significant factors used in trade name valuation are rates for royalties, future growth,
and a discount factor. Royalty rates are determined using an average of recent comparable values. 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.
Financial Instruments
Because of their short-term nature, the carrying value of our cash and cash equivalents, receivables and payables, short-
term debt and customer deposit liabilities approximates fair value. Substantially all of our long-term debt at both June 30,
2016 and 2015 consists of our term loan and revolving credit facility. The estimated fair value is equal to the carrying value
on those dates.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for
the 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.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance must
be established for deferred tax assets when it is more likely than not that the assets will not be realized.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the taxing authorities, based on the technical merits of the position. Most of the unrecognized
tax benefits, if recognized, would be recorded as a benefit to income tax expense.
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. We recognize interest and penalties related
to income tax matters as a component of income tax expense.
Revenue Recognition
Revenue is recognized when all of the following have occurred: persuasive evidence of a sales arrangement exists (e.g. a
wholesale purchase order or retail sales invoice); the sales arrangement specifies a fixed or determinable sales price; title
40
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
and risk of ownership has passed to the customer; no specific performance obligations remain; product is shipped or
services are provided to the customer; collectability is reasonably assured. As such, revenue recognition generally occurs
upon the shipment of goods to independent retailers or, in the case of Ethan Allen operated retail design centers, upon
delivery to the customer. If shipping is billed to customers, this is included in revenue. Recorded sales provide for estimated
returns and allowances. We permit our customers to return defective products and incorrect shipments, and terms we
offer are standard for the industry.
Shipping and Handling Costs
Our practice has been to sell our products at the same delivered cost to all retailers nationwide, regardless of shipping
point. Costs incurred by the Company to deliver finished goods are expensed and recorded in selling, general and
administrative expenses. Shipping and handling costs amounted to $71.7 million in fiscal year 2016, $67.3 million for fiscal
2015 and $67.1 million in fiscal 2014.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Our total advertising costs were $31.5 million in fiscal year
2016, $30.2 million in fiscal year 2015 and $29.5 million in fiscal year 2014. These amounts include advertising media
expenses, outside and inside agency expenses, certain website related fees and photo and video production net of
proceeds received by us under our agreement with the third-party financial institution responsible for administering our
consumer finance programs. Prepaid advertising costs at June 30, 2016 totaled $2.0 million compared to $1.8 million at
June 30, 2015.
Earnings Per Share
We compute basic earnings per share by dividing net income by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is calculated similarly, except that the weighted average
outstanding shares are adjusted to include the effects of converting all potentially dilutive share-based awards issued under
our employee stock plans (see Notes 9 and 10). Certain unvested share-based payment awards are participating securities
because they contain rights to receive non-forfeitable dividends (if paid). The earnings available to participating securities
under the two-class method of computing earnings per share is insignificant.
Share-Based Compensation
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option pricing model.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs,
including anticipated changes in the underlying stock price (i.e. expected volatility) and option exercise activity (i.e.
expected life). Expected volatility is based on the historical volatility of our stock and other contributing factors. The
expected life of options granted, which represents the period of time that the options are expected to be outstanding, is
based, primarily, on historical data. We estimate, as of the date of grant, the fair value of restricted stock units awarded
using a discounted cash flow model which requires management to make certain assumptions with respect to model inputs
including anticipated future dividends not paid during the restriction period, and a discount for lack of marketability for a
one-year holding period after vesting.
Share-based compensation expense is included in the Consolidated Statements of Operations within selling, general and
administrative expenses. Tax benefits associated with our share-based compensation arrangements are included in the
Consolidated Statements of Operations within income tax expense.
All shares of our common stock received in connection with the exercise of share-based awards have been recorded as
treasury stock and result in a reduction in shareholders’ equity.
Foreign Currency Translation
The functional currency of each Company operated foreign location is the respective local currency. Assets and liabilities
are translated into United States dollars using the current period-end exchange rate and income and expense amounts are
translated using the average exchange rate for the period in which the transaction occurred. Resulting translation
adjustments are reported as a component of accumulated other comprehensive income within shareholders’ equity.
41
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with
Customers. This ASU provides a framework for revenue recognition that replaces most existing GAAP revenue recognition
guidance when it becomes effective. We have an option to use either a retrospective approach or a cumulative effect
adjustment approach to implement the guidance. The new standard is effective for us on July 1, 2018, with early adoption
permitted in 2017. We are currently evaluating the impact of this guidance on our financial statements and the timing of
adoption, and have not yet selected a transition approach.
In April 2015 the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The new standard classifies
debt issuance costs as a deduction from the debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-
03, these costs were classified as assets. We adopted the provisions of ASU 2015-03 beginning in July 2015 and prior period
amounts have been reclassified to conform to the current period presentation. As of June 30, 2015, $0.3 million of debt
issuance costs were reclassified in the consolidated balance sheets from other noncurrent assets to current portion of long-
term debt and $1.0 million was reclassified from other noncurrent assets to long-term debt, less current portion. The
adoption of ASU 2015-03 did not impact our consolidated statements of comprehensive income, or our consolidated
statements of cash flows.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires the
Company to present all deferred tax assets and liabilities as noncurrent. This pronouncement is effective for the Company
on July 1, 2017, and early adoption is permitted. The Company is currently evaluating the impact on our consolidated
financial statements and the timing of adoption.
In February 2016, the FASB issued ASU 2016-02, Leases, which is intended to improve financial reporting about leasing
transactions. The ASU will require lessees that lease assets with lease terms of more than twelve months to recognize on
the balance sheet the assets and liabilities for the rights and obligations created by those leases. Lessors will remain largely
unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement
users better understand the amount, timing and uncertainty of cash flows arising from leases. This pronouncement is
effective for the Company on July 1, 2019, and early adoption is permitted. The Company is currently evaluating the impact
on our consolidated financial statements and the timing of adoption.
In March 2016, the FASB issued Accounting Standards 2016-09, Improvements to Employee Share-Based Payment
Accounting, which amends ASC Topic 718, Stock Compensation. The objective of this amendment is part of the FASB’s
Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including
the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of
cash flows. This pronouncement is effective for the Company on July 1, 2017, and allows for prospective, retrospective or
modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. The
Company is currently evaluating the impact on our consolidated financial statements and the timing of adoption.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which
states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as
estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and
transportation. The new guidance is effective for the Company on July 1, 2017. The new guidance should be applied
prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company
is currently evaluating the impact on our consolidated financial statements and the timing of adoption.
(2)
Business Acquisitions
From time to time the Company acquires design centers from its independent retailers in arms length transactions. There
were no material acquisitions completed during the three fiscal years ended June 30, 2016, 2015 and 2014 respectively.
(3)
Inventories
Inventories at June 30 are summarized as follows (in thousands):
42
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Fi ni s hed goods
Work i n proces s
Ra w ma teri a l s
Va l ua ti on a l l owa nce
Inventori es
2016
2015
$
129,627
$
118,537
9,497
27,554
(4,355)
10,537
25,943
(3,101)
$
162,323
$
151,916
(4)
Property, Plant and Equipment
Property, plant and equipment at June 30 are summarized as follows (in thousands):
La nd a nd i mprovements
Bui l di ng a nd i mprovements
Ma chi nery a nd equi pment
Property, pl a nt a nd equi pment, gros s
2016
2015
$
80,002
$
82,806
392,196
126,066
598,264
385,439
126,667
594,912
Les s : a ccumul a ted depreci a ti on a nd a morti za ti on
(324,649)
(317,877)
Property, pl a nt a nd equi pment, net
$
273,615
$
277,035
(5)
Goodwill and Other Intangible Assets
At both June 30, 2016 and 2015, we had $25.4 million of goodwill, and $19.7 million of other indefinite-lived intangible
assets consisting of Ethan Allen trade names, all of which is in our wholesale segment.
In the fourth quarter of fiscal years 2016, 2015, and 2014, the Company performed qualitative assessments of the fair value
of the wholesale reporting unit and concluded that the fair value of its goodwill exceeded its carrying value. In fiscal year
2011 the Company performed a quantitative assessment and determined the fair value of its wholesale reporting unit
exceeded its carrying value by a substantial margin. The fair value of the trade name exceeded its carrying value by a
substantial margin in fiscal years 2016, 2015 and 2014. To calculate fair value of these assets, management relies on
estimates and assumptions which by their nature have varying degrees of uncertainty. Management therefore looks for
third party transactions to provide the best possible support for the assumptions incorporated. Management considers
several factors to be significant when estimating fair value including expected financial outlook of the business, changes in
the Company’s stock price, the impact of changing market conditions on financial performance and expected future cash
flows, and other factors. Deterioration in any of these factors may result in a lower fair value assessment, which could lead
to impairment of the long-lived assets and goodwill of the Company.
(6)
Borrowings
Total debt obligations at June 30 consist of the following (in thousands):
Term l oa n
Revol ver
Ca pi ta l l ea s es a nd other
Tota l debt
Les s curent ma turi ti es
Tota l l ong-term debt
2016
2015
$
16,167
$
35,000
25,000
671
41,838
3,001
40,000
1,237
76,237
3,034
$
38,837
$
73,203
In September 2005, we issued $200 million in ten-year senior unsecured notes due October 1, 2015 (the "Senior Notes").
The Company entered into a five year, $150 million senior secured revolving credit and term loan facility on October 21,
2014, as amended (the “Facility”). The Facility, which expires on October 21, 2019, provides a term loan of up to $35 million
43
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
and a revolving credit line of up to $115 million, subject to borrowing base availability. During March 2015, we utilized $35
million of the term loan and $40 million of the revolving credit line, along with our available cash to fully redeem our Senior
Notes. We incurred financing costs of $1.5 million under the Facility, which are being amortized by the interest method,
over the remaining life of the Facility.
At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual
rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 1.75%, or (b) the higher of (i) the prime rate, (ii)
the federal funds effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 0.75%. At June 30, 2016 the
annual interest rate in effect on the revolving loan was 2.0%.
At the Company’s option, term loans under the Facility bear interest, based on the Company’s rent adjusted leverage ratio,
at an annual rate of either (a) LIBOR plus 1.75% to 2.25%, or (b) the higher of (i) the prime rate, (ii) the federal funds
effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.75% to 1.25%. At June 30, 2016 the annual interest rate
in effect on the term loan was 2.25%.
The Company pays a commitment fee of 0.15% to 0.25% per annum on the unused portion of the Facility, and fees on
issued letters of credit at an annual rate of 1.5% to 1.75% based on the average availability. Certain payments are restricted
if the availability under the revolving credit line falls below 20% of the total revolving credit line, and the Company is
subject to pro forma compliance with the fixed charge coverage ratio if applicable.
Quarterly installments of principal on the term loan are payable based on a straight line 15-year amortization period, with
the balance due at maturity. The Company does not expect to repay the revolving credit line portion of the Facility within
the next year.
The Facility is secured by all property owned, leased or operated by the Company in the United States and includes certain
real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur
debt; engage in mergers and consolidations; make restricted payments (including dividends and share repurchases); sell
certain assets; and make investments.
The Company must maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 at all times. If the outstanding term loans
are less than $17.5 million and the fixed charge coverage ratio equals or exceeds 1.25 to 1.0, the fixed charge coverage ratio
ceases to apply and thereafter is only triggered if average monthly availability is less than 15% of the amount of the
revolving credit line. During November 2015, we made a $16.5 million prepayment on the term loan, bringing the
outstanding term loan to $17.3 million, and the fixed charge coverage ratio ceased to apply. Our subsequent average
availability exceeded 65.0%, such that the fixed charge coverage ratio did not apply.
The Company intends to use the Facility for working capital and general corporate purposes, including dividend payments
and share repurchases, in addition to the refinancing of our Senior Notes which occurred in March 2015. At both June 30,
2016 and June 30, 2015, there was $0.2 million of standby letters of credit outstanding under the Facility. Total availability
under the Facility was $89.8 million at June 30, 2016 and $74.8 million at June 30, 2015. The increase was due to $15.0
million payments we made on the revolving loan during fiscal 2016.
At both June 30, 2016 and June 30, 2015, we were in compliance with all covenants of the Senior Notes and the credit
facilities.
The weighted-average interest rate applicable under our outstanding debt obligations for each of the last three fiscal years
were as follows:
Wei ghted-a vera ge i nteres t ra te
Fi s ca l Yea r Ended June 30,
2016
2.0%
2015
4.8%
2014
5.5%
Aggregate scheduled maturities of our debt obligations for each of the five fiscal years subsequent to June 30, 2016, and
thereafter are as follows (in thousands):
44
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Fi s ca l Yea r Ended June 30
2017
2018
2019
2020
2021
Subs equent to 2021
$
3,303
2,815
2,396
34,213
-
-
Tota l s chedul ed debt pa yments
$
42,727
(7)
Leases
We lease real property and equipment under various operating lease agreements expiring at various times through 2039.
Leases covering retail design center locations and equipment may require, in addition to stated minimums, contingent
rentals based on retail sales or equipment usage. Generally, the leases provide for renewal for various periods at stipulated
rates. Future minimum lease payments under non-cancelable operating leases for each of the five fiscal years subsequent
to June 30, 2016, and thereafter are shown in the table following. Also shown are minimum future rentals from subleases,
which will partially offset lease payments in the aggregate (in thousands):
Fi s ca l Yea r Ended June 30,
2017
2018
2019
2020
2021
Subs equent to 2021
Tota l
Mi ni mum
Future
Lea s e
Pa yments
Mi ni mum
Future
Subl ea s e
Renta l s
$
33,895
$
1,990
32,197
28,517
24,439
22,081
74,291
2,009
1,460
956
767
766
$
215,420
$
7,948
Total rent expense for each of the past three fiscal years ended June 30 was as follows (in thousands):
2016
2015
2014
Ba s i c renta l s under opera ti ng l ea s es
$
31,692
$
31,220
$
31,168
Conti ngent renta l s under opera ti ng l ea s es
180
160
215
Ba s i c a nd conti ngent renta l s
Les s : s ubl ea s e rent
Tota l rent expens e
31,872
(1,964)
31,380
(3,062)
31,383
(2,494)
$
29,908
$
28,318
$
28,889
Deferred rent credits and deferred lease incentives are reflected in the Consolidated Balance Sheets and are amortized over
the respective underlying lease terms on a straight-line basis as a reduction of rent expense. The amounts for the past two
fiscal years are as follows:
Deferred rent credi ts
Deferred l ea s e i ncenti ves
(8)
Shareholders' Equity
2016
13,003
4,538
$
$
2015
12,362
3,762
$
$
Our authorized capital stock consists of (a) 150,000,000 shares of Class A Common Stock, par value $.01 per share, (b)
600,000 shares of Class B Common Stock, par value $.01 per share, and (c) 1,055,000 shares of Preferred Stock, par value
45
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
$.01 per share, of which (i) 30,000 shares have been designated Series A Redeemable Convertible Preferred Stock, (ii)
30,000 shares have been designated Series B Redeemable Convertible Preferred Stock, (iii) 155,010 shares have been
designated as Series C Junior Participating Preferred Stock, and (iv) the remaining 839,990 shares may be designated by the
Board of Directors with such rights and preferences as they determine (all such preferred stock, collectively, the "Preferred
Stock"). Shares of Class B Common Stock are convertible to shares of our Common Stock upon the occurrence of certain
events or other specified conditions being met. As of June 30, 2016 and 2015, there were no shares of Preferred Stock or
Class B Common Stock issued or outstanding.
Share Repurchase Program
On November 21, 2002, our Board of Directors approved a share repurchase program authorizing us to repurchase up to
2,000,000 shares of our common stock, from time to time, either directly or through agents, in the open market at prices
and on terms satisfactory to us. Subsequent to that date, the Board of Directors increased the aggregate authorization
under the repurchase program on several separate occasions, the last of which was on April 13, 2015 when the Board of
Directors increased the aggregate authorization to approximately 3,000,000 shares. There is no expiration date on the
repurchase authorization and the amount and timing of future share repurchases, if any, will be determined as market and
business conditions warrant. As of June 30, 2016 we had a remaining Board authorization to repurchase 1.8 million shares.
During the past three fiscal years, we repurchased the following shares of our common stock (trade date basis):
Common s ha res repurcha s ed
697,799
645,831
-
Cos t to repurcha s e common s ha res
$
19,346,104
$
16,469,725
$
-
Avera ge pri ce per s ha re
$
27.72
$
25.50
$
-
2016
2015
2014
For the fiscal years presented above, we funded our purchases of treasury stock with existing cash on hand and cash
generated through current period operations. All of our common stock repurchases are recorded as treasury stock and
result in a reduction of shareholders’ equity.
(9)
Earnings per Share
The following table sets forth the calculation of weighted average shares for the fiscal years ended June 30 (in thousands):
Wei ghted a vera ge s ha res of common s tock
outs ta ndi ng for ba s i c ca l cul a ti on
28,072
28,874
28,918
2016
2015
2014
Effect of di l uti ve s tock opti ons a nd other
s ha re-ba s ed a wa rds
252
308
358
Wei ghted a vera ge s ha res of common s tock
outs ta ndi ng a djus ted for di l uti on ca l cul a ti on
28,324
29,182
29,276
Certain restricted stock awards and the potential exercise of certain stock options were excluded from the respective
diluted earnings per share calculation because their impact is anti-dilutive. In 2016, 2015 and 2014, stock options and share
based awards of 460,155, 591,058 and 724,292, respectively, have been excluded.
46
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(10)
Share-Based Compensation
For the twelve months ended June 30, 2016, 2015, and 2014, share-based compensation expense totaled $2.4 million, $1.2
million, and $1.3 million respectively. These amounts have been included in the Consolidated Statements of Comprehensive
Income within selling, general and administrative expenses. During the twelve months ended June 30, 2016, 2015, and
2014, we recognized related tax benefits associated with our share-based compensation arrangements totaling $0.8
million, $0.5 million and $0.5 million, respectively (before valuation allowances). Such amounts have been included in the
Consolidated Statements of Comprehensive Income within income tax expense.
At June 30, 2016, we had 1,341,207 shares of common stock available for future issuance pursuant to the 1992 Stock
Option Plan (the “Plan”). The maximum number of shares of common stock reserved for issuance under the Plan is
6,487,867 shares. The Plan provides for the grant of non-compensatory stock options to eligible employees and non-
employee directors. Stock options unde the Plan are non-qualified under section 422 of the Internal Revenue Code and
allow for the purchase of shares of our common stock. The Plan also provides for the issuance of stock appreciation rights
("SARs") on issued options, however no SARs have been issued to date. The awarding of such options is determined by the
Compensation Committee of the Board of Directors after consideration of recommendations proposed by the Chief
Executive Officer. Options are generally granted with an exercise price equal to the market price of our common stock at
the date of grant, vest ratably over a specified service period, and have a contractual term of 10 years. Equity awards can
also include performance vesting conditions. Company policy further requires an additional one year holding period beyond
the service vest date for certain executives. Beginning January 31, 2014, grants to employees included both company
performance and service vesting conditions (as further described below). Grants to independent directors had a 3 year
service vest condition. Following is a description of grants made under the Plan.
Stock Option Awards
We estimate, as of the date of grant, the fair value of stock options awarded using the Black-Scholes option pricing model.
Use of a valuation model requires management to make certain assumptions with respect to selected model inputs,
including anticipated changes in the underlying stock price (i.e. expected volatility) and option exercise activity (i.e.
expected life). Expected volatility is based on the historical volatility of our stock. The risk-free rate of return is based on the
U.S. Treasury bill rate extrapolated to the term matching the expected life of the grant. The dividend yield is based on the
annualized dividend rate at the grant date relative to the grant date stock price. The expected life of options granted, which
represents the period of time that the options are expected to be outstanding, is based, primarily, on historical data. The
weighted average assumptions used for fiscal years ended June 30 are noted in the following table:
Vol a ti l i ty
Ri s k-free ra te of return
Di vi dend yi el d
Expected a vera ge l i fe (yea rs )
2016
48.1%
1.93%
1.95%
6.3
2015
52.9%
2.03%
2.09%
6.7
2014
56.3%
1.52%
1.55%
5.2
Options granted to employees beginning January 1, 2014 vest provided certain performance and service conditions are met
(“Performance Options”). The performance conditions allow the potential vesting in three equal tranches, provided
attainment of a minimum annual 5% growth in operating income (as defined in the agreement) for each of the ensuing
three fiscal years. If the minimum annual growth is not achieved in any fiscal year, that tranche is forfeited, except that if a
cumulative compound growth rate of 5% is achieved at the end of the three fiscal years, performance conditions for all
three tranches will have been met. Service conditions require an additional period after performance conditions are met.
Consequently, assuming both performance and service conditions are met, shares become exercisable between 3 and 5
years from grant date. At June 30, 2016, 196,000 Performance Options achieved the performance conditions, and
consequently will vest ratably in three equal tranches on the grant date anniversary in years three, four and five provided
service conditions are also met. The Company considers the remaining 130,000 Performance Options to be probable of
achieving the respective performance conditions so they are being amortized to expense over their respective service
periods. The Performance Options are reflected in the options tables presented below. All options were issued at the
closing stock price on each grant date, and have a contractual term of 10 years. A summary of stock option activity
occurring during the fiscal year ended June 30, 2016 is presented below.
47
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Opti ons
Sha res
Wei ghted
Avera ge
Exerci s e
Pri ce
Wei ghted
Avera ge
Rema i ni ng
Contra ctua l
Term (yrs )
Aggrega te
Intri ns i c Va l ue
Outs ta ndi ng - June 30, 2015
994,888
$
24.33
Gra nted
Exerci s ed
Ca ncel ed (forfei ted/expi red)
Outs ta ndi ng - June 30, 2016
24,367
(36,958)
(75,224)
907,073
28.73
19.87
30.85
24.08
Exerci s a bl e - June 30, 2016
553,371
$
22.93
5.1
3.1
$
8,308,141
$
5,778,995
All options granted during fiscal 2016 were to non-employee independent directors of the Company as compensation for
their services. The weighted average grant-date fair value of options granted during fiscal 2016, 2015 and 2014 was $11.53,
$11.30 and $11.42 respectively. The total intrinsic value of options exercised during 2016, 2015 and 2014 was $0.3 million,
$4.5 million, and $0.2 million, respectively. As of June 30, 2016, there was $2.0 million of total unrecognized compensation
cost related to nonvested options granted under the Plan. That cost is expected to be recognized over a weighted average
period of 2.6 years. A summary of the nonvested shares as of June 30, 2016 and changes during the year then ended is
presented below.
Opti ons
Nonves ted June 30, 2015
Gra nted
Ves ted
Ca ncel ed (forfei ted/expi red)
Nonves ted a t June 30, 2016
Restricted Stock Awards
Sha res
454,574
24,367
(96,191)
(29,048)
353,702
Wei ghted Avera ge
Gra nt Da te Fa i r Va l ue
$
10.49
11.53
7.59
11.33
$
11.28
No new restricted stock awards were granted during fiscal 2016. A summary of nonvested restricted share activity occurring
during the fiscal year ended June 30, 2016 is presented below.
Res tri cted Awa rds
Nonves ted - June 30, 2015
Gra nted
Ves ted
Ca ncel ed (forfei ted/expi red)
Nonves ted - June 30, 2016
Sha res
21,000
-
(21,000)
-
-
Wei ghted Avera ge
Gra nt Da te Fa i r Va l ue
$
13.61
$
13.61
$
-
As of June 30, 2016, there was no unrecognized compensation cost related to restricted shares granted under the Plan. The
total fair value of restricted shares vested during the fiscal years ending June 30, 2016 and 2015 was $0.7 million and $0.8
million respectively.
Stock Unit Awards
We account for stock unit awards as equity-based awards because upon vesting, they will be settled in common shares.
These awards, which contain time and other vesting conditions, may also contain performance conditions providing
recipients a contingent right to receive shares of the Company's common stock ("Performance Units"), conditioned upon
the Company's achievement of certain performance targets and goals, and subject to the terms of the agreements. For
Performance Units, we expense as compensation cost the fair value of the shares as of the grant date, and amortize
expense ratably over the total performance and time vest period, taking into account the probability that we will satisfy the
48
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
performance goals. We estimate, as of the date of grant, the fair value of Performance Units with a discounted cash flow
model, using as model inputs the risk-free rate of return as the discount rate, dividend yield for dividends not paid during
the restriction period, and a discount for lack of marketability for a one-year post-vest holding period. The lack of
marketability discount used is the present value of a future put option using Monte-Carlo and Black-Scholes pricing models.
The weighted average assumptions used for the fiscal year ended June 30 is noted in the table following. No Performance
based restricted stock unit awards were granted under the Plan prior to December 1, 2015.
Vol a ti l i ty
Ri s k-free ra te of return
Di vi dend yi el d
Expected a vera ge l i fe (yea rs )
2016
33.3%
0.77%
1.99%
1.75
For each grant of Performance Units, the amount of the grant that will be earned and paid will be determined by reference
to the achievement of certain performance goals for each of two initial fiscal years (on a cumulative basis) and the three
fiscal years (on a cumulative basis) applicable to such grant.
A summary of stock unit activity occurring during the fiscal year ended June 30, 2016 is presented below.
Wei ghted
Avera ge
Gra nt Da te
Fa i r Va l ue
Uni ts
Non-ves ted uni ts a t June 30, 2015
126,000
$
24.67
Gra nted
Ves ted
Ca ncel ed (forfei ted/expi red)
92,050
24.34
-
-
-
-
Non-ves ted uni ts a t June 30, 2016
218,050
24.53
As of June 30, 2016, there was $1.4 million of total unrecognized compensation cost related to nonvested units granted
under the Plan based on our probability estimates. That cost is expected to be recognized over a weighted average
period of 1.3 years.
(11)
Income Taxes
Income tax expense (benefit) attributable to income from operations consists of the following for the fiscal years ended
June 30 (in thousands):
Current:
Federa l
Sta te
Forei gn
Tota l current
Deferred:
Federa l
Sta te
Forei gn
Tota l deferred
2016
2015
2014
$
27,660
$
15,064
$
20,693
2,898
88
30,646
(237)
207
703
673
489
55
15,608
2,979
759
195
3,933
1,900
60
22,653
(941)
(1,921)
(320)
(3,182)
Income Ta x Expens e (Benefi t)
$
31,319
$
19,541
$
19,471
The following is a reconciliation of expected income tax expense (benefit) (computed by applying the federal statutory
income tax rate to income before taxes) to actual income tax expense (benefit) (in thousands):
49
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
2016
2015
2014
Expected Income Ta x Expens e
$
30,785
35.0%
$
19,839
35.0%
$
21,841
35.0%
Sta te i ncome ta xes , net of federa l i ncome ta x
Va l ua ti on a l l owa nce
2,514
339
Secti on 199 Qua l i fi ed Producti on Acti vi ti es deducti on
(1,513)
Unrecogni zed ta x expens e (benefi t)
Other, net
(479)
(327)
2.9%
0.4%
-1.7%
-0.5%
-0.4%
1,597
409
(998)
(641)
(665)
2.8%
0.7%
-1.8%
-1.1%
-1.2%
2,209
(1,540)
(1,342)
(904)
(793)
3.5%
-2.5%
-2.2%
-1.4%
-1.3%
Actua l i ncome ta x expens e (benefi t)
$
31,319
35.6%
$
19,541
34.5%
$
19,471
31.2%
The deferred income tax asset and liability balances at June 30 (in thousands) include:
Deferred ta x a s s ets :
Empl oyee compens a ti on a ccrua l s
$
4,343
$
4,555
2016
2015
Stock ba s ed compens a ti on
Deferred rent credi ts
Net opera ti ng l os s ca rryforwa rds
Goodwi l l
Other, net
Tota l deferred ta x a s s ets
Les s : Va l ua ti on a l l owa nce
Net deferred ta x a s s ets
2,665
6,705
3,375
1,729
2,659
21,476
(2,155)
2,639
5,943
4,059
2,748
3,241
23,185
(1,816)
$
19,321
$
21,369
2016
2015
Deferred ta x l i a bi l i ti es :
Property, pl a nt a nd equi pment
$
654
$
1,358
Inta ngi bl e a s s ets other tha n goodwi l l
Commi s s i ons
Other, net
Tota l deferred ta x l i a bi l i ty
14,260
3,478
-
18,392
14,261
3,999
149
19,767
Tota l net deferred ta x a s s et
$
929
$
1,602
The deferred tax balances are classified in the Consolidated Balance Sheets as follows at June 30 (in thousands):
Current a s s ets
Non-current a s s ets
Current l i a bi l i ti es
Non-current l i a bi l i ti es
2016
2015
$
3,174
$
2,301
3,001
-
5,246
3,932
-
4,631
Tota l net deferred ta x a s s et
$
929
$
1,602
Current deferred tax assets and liabilities and non-current deferred tax assets and liabilities have been presented net in the
Consolidated Balance Sheets.
We evaluate our deferred taxes to determine if the “more likely than not” standard of evidence has not been met thereby
supporting the need for a valuation allowance. A valuation allowance must be established for deferred tax assets when it is
50
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
less than 50% likely that assets will be realized. At June 30 of 2016 and 2015, such an allowance was in place against the
Belgian foreign tax assets, and at June 30, 2016 this valuation allowance was approximately $2.2 million.
The Company’s deferred income tax assets at June 30, 2016 with respect to the net operating losses expire as follows (in
thousands):
Deferred
Net Opera ti ng
Income
Los s
Ta x As s ets
Ca rryforwa rds
Uni ted Sta tes (Sta te), expi ri ng between 2017 a nd 2032
$
1,086
$
24,130
Forei gn, Expi ri ng i n 2034
2,289
6,809
Deferred U.S. federal income taxes are not provided for unremitted foreign earnings of our foreign subsidiaries because we
expect those earnings will be permanently reinvested.
Uncertain Tax Positions
We recognize interest and penalties related to income tax matters as a component of income tax expense. If the $2.2
million of unrecognized tax benefits and related interest and penalties as of June 30, 2016 were recognized, approximately
$1.4 million would be recorded as a benefit to income tax expense. A reconciliation of the beginning and ending amount of
unrecognized tax benefits including related interest and penalties as of June 30, 2016 and 2015 is as follows (in thousands):
Begi nni ng ba l a nce
Addi ti ons for ta x pos i ti ons ta ken
Reducti ons for ta x pos i ti ons ta ken i n pri or yea rs
Settl ements
Endi ng ba l a nce
2016
2015
$
3,117
$
4,699
776
(1,530)
(193)
568
(1,555)
(596)
$
2,170
$
3,117
It is reasonably possible that various issues relating to approximately $0.4 million of the total gross unrecognized tax
benefits as of June 30, 2016 will be resolved within the next twelve months as exams are completed or statutes expire. If
recognized, approximately $0.3 million of unrecognized tax benefits would reduce our tax expense in the period realized.
However, actual results could differ from those currently anticipated.
The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax
returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, the Company is subject to
examination by the taxing authorities in such major jurisdictions as the U.S. Canada, Mexico, Belgium and Honduras. As of
June 30, 2016, the Company and certain subsidiaries are currently under audit from 2010 through 2015 in the U.S. While
the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next twelve
months, it is not anticipated that any of the changes will be significant.
(12)
Employee Retirement Programs
The Ethan Allen Retirement Savings Plan
The Ethan Allen Retirement Savings Plan (the "Savings Plan") is a defined contribution plan, which is offered to substantially
all of our employees who have completed three consecutive months of service regardless of hours worked. We may, at our
discretion, make a matching contribution to the 401(k) portion of the Savings Plan on behalf of each participant. Total
401(k) Company match expense amounted to $3.4 million in 2016, $3.3 million in 2015, and $2.8 million in 2014. The
contribution was made entirely in cash in 2016, 2015 and 2014.
Other Retirement Plans and Benefits
Ethan Allen provides additional benefits to selected members of senior and middle management in the form of previously
entered deferred compensation arrangements and a management cash bonus and other incentive programs. The total cost
of these benefits was $3.6 million, $3.7 million, and $3.5 million in 2016, 2015 and 2014, respectively.
51
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(13)
Litigation
We are routinely party to various legal proceedings, including investigations or as a defendant in litigation, in the ordinary
course of business. We are also subject to various federal, state and local environmental protection laws and regulations
and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such
investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and
hazardous wastes. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects
on the environment of the disposal or release of certain hazardous materials.
Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture
finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these
requirements has been facilitated through the introduction of high solids coating technology and alternative formulations.
In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials
to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection
plans and controls, and further development of related inspection/audit teams, all of which have served to reduce
emissions per unit of production. We remain committed to implementing new waste minimization programs and/or
enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated
with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which
serve to minimize emissions and safety risks for employees. In order to reduce the use of hazardous materials in the
manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing
operations and production methods. We believe that our facilities are in material compliance with all such applicable laws
and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.
On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered
“remote”, “reasonably possible” or “probable” as defined by U.S. GAAP. Where we determine an unfavorable outcome is
probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with
respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if
any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in
the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we
determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation
loss.
Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management
believes that the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a
material adverse effect on our financial position, results of operations or cash flows.
(14)
Accumulated Other Comprehensive Income
The following table sets forth the activity in accumulated other comprehensive income for the fiscal year ended June 30,
2016 (in thousands):
Ba l a nce June 30, 2015
Cha nges before recl a s s i fi ca ti ons
Amounts recl a s s i fi ed from a ccumul a ted
other comprehens i ve i ncome
Current peri od other comprehens i ve i ncome
Forei gn
currency
tra ns l a ti on
a djus tments
$
(2,638)
(2,208)
-
(2,208)
Ba l a nce June 30, 2016
$
(4,846)
Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our
operations in Canada, Belgium, Honduras and Mexico, and exclude income taxes given that the earnings of non-U.S.
subsidiaries are deemed to be reinvested for an indefinite period of time.
52
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(15)
Segment Information
Our operations are classified into two operating segments: wholesale and retail. These operating segments represent
strategic business areas which, although they operate separately and provide their own distinctive services, enable us to
more effectively offer our complete line of home furnishings and accents.
The wholesale segment is principally involved in the development of the Ethan Allen brand, which encompasses the design,
manufacture, domestic and offshore sourcing, sale and distribution of a full range of home furnishings and accents to a
network of independently operated and Ethan Allen operated design centers as well as related marketing and brand
awareness efforts. Wholesale revenue is generated upon the wholesale sale and shipment of our product to all retail design
centers, including those operated by Ethan Allen. Wholesale profitability includes (i) the wholesale gross margin, which
represents the difference between the wholesale sales price and the cost associated with manufacturing and/or sourcing
the related product, and (ii) other operating costs associated with wholesale segment activities.
The retail segment sells home furnishings and accents to consumers through a network of Company operated design
centers. Retail revenue is generated upon the retail sale and delivery of our product to our customers. Retail profitability
includes (i) the retail gross margin, which represents the difference between the retail sales price and the cost of goods
purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities.
Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment, including the
related profit margin.
We evaluate performance of the respective segments based upon revenues and operating income. While the manner in
which our home furnishings and accents are marketed and sold is consistent, the nature of the underlying recorded sales
(i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing,
sourcing, and distribution versus retail selling) are different. Within each segment, we maintain revenue information
according to each respective product line (i.e. case goods, upholstery, or home accents and other). A breakdown of
wholesale sales by product line for each of the last three fiscal years ended June 30 is provided below:
Ca s e Goods
Uphol s tered Products
Home Acces s ori es a nd Other
Fi s ca l Yea r Ended June 30,
2014
2015
36%
34%
48%
48%
16%
18%
2016
32%
51%
17%
100%
100%
100%
A breakdown of retail sales by product line for each of the last three fiscal years ended June 30 is provided below:
Ca s e Goods
Uphol s tered Products
Home Accents a nd Other
Fi s ca l Yea r Ended June 30,
2015
32%
45%
23%
2014
33%
45%
22%
2016
30%
48%
22%
100%
100%
100%
53
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Information for each of the last three fiscal years ended June 30 is provided below (in thousands):
Net s a l es :
Whol es a l e s egment
2016
2015
2014
$
491,467
$
469,384
$
453,607
Reta i l s egment
El i mi na ti on of i nter-compa ny s a l es
626,511
(323,776)
579,713
(294,497)
580,739
(287,687)
Cons ol i da ted Tota l
$
794,202
$
754,600
$
746,659
Opera ti ng i ncome (l os s ):
Whol es a l e s egment
$
74,412
$
66,988
$
57,816
Reta i l s egment
Adjus tment of i nter-compa ny profi t (1)
16,450
(1,683)
1,726
(2,780)
10,515
1,305
Cons ol i da ted Tota l
$
89,179
$
65,934
$
69,636
Depreci a ti on & Amorti za ti on:
Whol es a l e s egment
Reta i l s egment
Cons ol i da ted Tota l
Ca pi ta l expendi tures :
Whol es a l e s egment
Reta i l s egment
Acqui s i ti ons
Cons ol i da ted Tota l
Tota l As s ets :
Whol es a l e s egment
Reta i l s egment
Inventory profi t el i mi na ti on (2)
$
7,587
11,766
$
8,044
11,098
$
7,887
10,043
$
19,353
$
19,142
$
17,930
$
12,446
$
9,427
$
11,013
10,521
165
10,360
1,991
8,292
-
$
23,132
$
21,778
$
19,305
June 30,
2016
June 30,
2015
0
June 30,
2014
$
271,116
$
295,949
$
339,271
339,942
(33,649)
341,886
(31,858)
344,025
(28,862)
Cons ol i da ted Tota l
$
577,409
$
605,977
$
654,434
(1)
(2)
Represents the change in wholesale profit contained in Ethan Allen design center inventory at the end of the period.
The wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the
related inventory is sold.
Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail
segment sales to consumers through the Company operated design centers. The number of international design
centers, and the related net sales as a percent of our consolidated net sales is shown in the following table.
Independent design centers
Company operated design centers
Total international design centers
Fiscal Year Ended June 30,
2016
103
6
109
2015
97
7
104
2014
91
8
99
Percentage of consolidated net sales
9.2%
11.6%
10.6%
54
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(16)
Selected Quarterly Financial Data (Unaudited)
Tabulated below is selected financial data for each quarter of the fiscal years ended June 30, 2016, 2015, and 2014 (in
thousands, except per share data):
Fi s ca l 2016:
Net Sa l es
Gros s profi t
Net i ncome
Ea rni ngs per ba s i c s ha re
Ea rni ngs per di l uted s ha re
Di vi dends decl a red per common s ha re
Fi s ca l 2015:
Net Sa l es
Gros s profi t
Net i ncome
Ea rni ngs per ba s i c s ha re
Ea rni ngs per di l uted s ha re
Di vi dends decl a red per common s ha re
Fi s ca l 2014:
Net Sa l es
Gros s profi t
Net i ncome
Ea rni ngs per ba s i c s ha re
Ea rni ngs per di l uted s ha re
Di vi dends decl a red per common s ha re
(17)
Financial Instruments
September 30
December 31
Ma rch 31
June 30
Qua rter Ended
$
190,391
$
207,535
$
190,583
$
205,693
104,673
13,147
0.46
0.46
0.14
116,058
16,534
0.58
0.58
0.14
105,717
10,178
0.37
0.36
0.17
115,788
16,778
0.60
0.60
0.17
$
190,706
$
197,067
$
173,259
$
193,568
104,803
11,879
0.41
0.41
0.12
106,074
10,038
0.35
0.34
0.12
94,110
2,536
0.09
0.09
0.12
106,176
12,689
0.44
0.44
0.14
$
181,659
$
193,104
$
173,061
$
198,835
98,743
9,034
0.31
0.31
0.10
105,999
11,555
0.40
0.39
0.10
93,130
5,258
0.18
0.18
0.10
108,624
17,084
0.59
0.58
0.10
We determine fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an
orderly transaction between market participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based on assumptions that market participants would
use in pricing the asset or liability, not on assumptions specific to the Company. In addition, the fair value of liabilities
includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in
one of the three levels, determined by the lowest level input that is significant to the fair value measurement in its entirety.
These levels are:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and similar techniques.
The following section describes the valuation methodologies we use to measure different financial assets and liabilities at
fair value.
55
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents our assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and June
30, 2015
(in thousands):
June 30, 2016
Level 1
Level 2
Level 3
Ba l a nce
Ca s h equi va l ents
$
60,479
$
-
$
-
$
60,479
Ava i l a bl e-for-s a l e s ecuri ti es
-
-
-
-
Tota l
$
60,479
$
-
$
-
$
60,479
June 30, 2015
Level 1
Level 2
Level 3
Ba l a nce
Ca s h equi va l ents
$
84,192
$
-
$
-
$
84,192
Ava i l a bl e-for-s a l e s ecuri ti es
-
2,198
-
2,198
Tota l
$
84,192
$
2,198
$
-
$
86,390
Cash equivalents consist of money market accounts, and mutual funds in U.S. government and agency fixed income
securities. We use quoted prices in active markets for identical assets or liabilities to determine fair value. There were no
transfers between level 1 and level 2 during fiscal years 2016 or 2015. At June 30, 2016 and 2015, $7.8 million and $8.0
million, respectively, of cash equivalents were restricted and classified as a long-term asset.
We did not hold any available-for-sale securities at June 30, 2016 as all municipal bonds matured and the proceeds were
transferred to our operating cash accounts. As of June 30, 2015, available for sale securities consisted of $2.2 million in U.S.
municipal bonds, with maturities of less than two years, and were rated A/A2 or better by S&P/Moody’s respectively. There
were no material gross unrealized gains or losses on available-for-sale securities at June 30, 2016 or June 30, 2015.
The contractual maturities of our available-for-sale investments as of June 30, 2015 were as follows (in thousands):
June 30, 2015
Amorti zed
Cos t
Es ti ma ted
Fa i r Va l ue
Cos t
Due i n one yea r or l es s
$
2,296
$
2,155
$
2,198
Due a fter one yea r through fi ve yea rs
$
-
$
-
There were no proceeds from sales of investments available for sale in fiscal 2016 and $15.4 million during fiscal 2015,
resulting in no material gain or loss in either period. There were no investments that have been in a continuous loss
position for more than one year, and there have been no other-than-temporary impairments recognized.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis. These
assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the year ended
June 30, 2015, we determined that certain long-lived assets of our retail design centers in Belgium were impaired, and an
impairment charge of $0.8 million was recorded at that time.
(18)
Restricted Cash and Investments
At June 30, 2016 and 2015 we held $7.8 million and $8.0 million, respectively, of cash and investments in lieu of providing
letters of credit for the benefit of the provider of our workmen’s compensation and other insurance liabilities. These
restricted funds, which can be invested by us in money market mutual funds, and U.S. Treasuries and U.S. Government
agency fixed income instruments with maturities of two years or less, cannot be withdrawn from our account without the
prior written consent of the secured parties. These restricted funds are classified as long-term assets because they are not
expected to be used within one year to fund operations. See also Note 17, “Financial Instruments”.
56
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(19)
Subsequent Events
None.
(20)
Valuation and Qualifying Accounts
The following table provides information regarding the Company’s sales discounts, sales returns and allowance for doubtful
accounts (in thousands):
Ba l a nce a t
Begi nni ng
of Peri od
Addi ti ons
(Reducti ons )
Cha rged to
Income
Adjus tments
a nd/or
Deducti ons
Ba l a nce a t
End of
Peri od
Accounts Recei va bl e:
Sa l es di s counts , s a l es returns a nd
a l l owa nce for doubtful a ccounts :
June 30, 2016
June 30, 2015
June 30, 2014
$
1,386
$
253
$
-
$
1,639
1,442
(56)
-
1,386
$
1,230
$
212
$
-
$
1,442
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer ("CEO") and Chief Financial Officer("CFO"), as appropriate, to allow timely decisions regarding required
financial disclosure.
We carried out an evaluation, under the supervision and with the participation of our management, including the CEO and
the CFO, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the CEO and CFO have concluded that, as of June 30,
2016, our disclosure controls and procedures were effective in ensuring that material information relating to us (including
our consolidated subsidiaries), which is required to be disclosed by us in our periodic reports filed or submitted to the SEC is
(i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii)
accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such
term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP.
Our internal control over financial reporting includes those policies and procedures that:
•
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in
57
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
accordance with authorizations of our management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of our assets that could have a material effect on our financial statements.
Management has assessed the effectiveness of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework). Based on that evaluation, management concluded that our internal control over financial reporting was
effective as of June 30, 2016 to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of consolidated financial statements for external reporting purposes in accordance with U.S. GAAP.
KPMG LLP, the independent registered public accounting firm that audited the consolidated financial statements included
in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of
June 30, 2016, as stated in their report included under Item 8 of this Annual Report.
Changes in Internal Control over Financial Reporting
During fiscal 2016, we adopted the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in the 2013 Internal Control–Integrated Framework to review, document and test our internal
control over financial reporting. We may from time to time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business. These efforts may lead to various changes in our internal control over
financial reporting.
Item 9B. Other Information
None.
PART III
Except as set forth below, the information required by Items 10, 11, 12, 13 and 14 is incorporated by reference to Ethan
Allen Interiors Inc. proxy statement for the Annual Meeting of Shareholders scheduled to be held on November 16, 2016
(the "Proxy Statement") to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our 2016 fiscal
year.
Item 10. Directors, Executive Officers and Corporate Governance
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions. Our code of ethics can be accessed via our website
at www.ethanallen.com/governance.
We intend to disclose any amendment of our Code of Ethics, or any waiver of any provision thereof, applicable to our
principal executive officer and/or principal financial officer, or persons performing similar functions, directors and other
executive officers on our website within 4 days of the date of such amendment or waiver. In the case of a waiver, the
nature of the waiver, the name of the person to whom the waiver was granted, and the date of the waiver will also be
disclosed.
Information contained on, or connected to, our website is not incorporated by reference into this Form 10-K and should not
be considered part of this or any other report that we file with, or furnish to, the SEC.
Identification of Executive Officers
The information set forth under the heading “Executive Officers of the Registrant” in Part I, Item 1 of this form 10-K is also
incorporated by reference in this section.
Audit Committee Financial Expert
Our Board of Directors has determined that we have four "audit committee financial experts", as defined under Item
407(d)(5)(ii) of Regulation S-K of the Securities Exchange Act of 1934, currently serving on our Audit Committee. Those
members of our Audit Committee who are deemed to be audit committee financial experts are as follows:
58
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
James B. Carlson
Clinton A. Clark
Domenick J. Esposito
James W. Schmotter
All persons identified as audit committee financial experts are independent from management as defined by the applicable
listing standards of the New York Stock Exchange.
The remaining information required by this Item will be included in and is incorporated herein by reference from our
definitive proxy statement for our 2016 Annual Meeting of Shareholders to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of our 2016 fiscal year, or our 2016 Proxy Statement.
Item 11. Executive Compensation
The information required by this Item will be included in and is incorporated herein by reference from our 2016 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this Item is incorporated by reference to the sections entitled ["Equity Compensation Plan
Information"] and ["Security Ownership of Common Stock of Certain Owners and Management"] in the 2016 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to the section entitled ["Certain Relationships and
Related Party Transactions"] and ["Corporate Governance —Director Independence "] in the 2016 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference to the sections entitled ["Audit Fees"] and ["Audit and
Non-Audit Engagement Pre-Approval Policy "] in the 2016 Proxy Statement.
Item 15. Exhibits and Financial Statement Schedules
PART IV
(a)(1)
Financial Statements. Our Consolidated Financial Statements, included under Item 8 hereof, as required
at June 30, 2016 and 2015, and for the years ended June 30, 2016, 2015 and 2014 consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to Consolidated Financial Statements
(a)(2)
Financial Statement Schedules. None.
(b)
The following Exhibits are filed as part of this report on Form 10-K:
Exhibit
Number
3 (a)
Exhibit
Restated Certificate of Incorporation of the Company dated as of March 23, 1993, Certificate of
Amendment to Restated Certificate of Incorporation dated as of August 5, 1997, Second Certificate of
Amendment to Restated Certificate of Incorporation dated as of March 27, 1998, Third Certificate of
Amendment to Restated Certificate of Incorporation dated as of April 28, 1999, Fourth Amendment to
Restated Certificate of Incorporation dated as of December 5, 2013, Fifth Amendment to Restated
Certificate of Incorporation dated as of December 11, 2015 (incorporated by reference to the
59
3 (b)
3 (c)
3 (d)
3 (e)
3 (f)
3 (g)
3 (g)-1
3 (h)
3 (i)
3 (i)-1
3 (j)
3 (k)
3 (l)
3 (l)-1
3 (m)
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Quarterly Report on Form 10-Q of the Company filed with the SEC on January 27, 2016)
Certificate of Designations relating to the New Convertible Preferred Stock dated as of March 23, 1993
(incorporated by reference to Exhibit 3(b) to the Annual Report on Form 10-K of the Company filed
with the SEC on August 8, 2012)
Certificate of Designations of Series C Junior Participating Preferred Stock dated as of July 3, 1996, and
Certificate of Amendment of Certificate of Designations of Series C Junior Participating Preferred Stock
dated as of December 27, 2004 (incorporated by reference to Exhibit 3(c) to the Annual Report on
Form 10-K of the Company filed with the SEC on August 8, 2012)
Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3(d) to the
Registration Statement on Form S-1 of the Company filed with the SEC on March 16, 1993)
Certificate of Incorporation of Ethan Allen Global, Inc. (incorporated by reference to Exhibit 3(e) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
By-laws of Ethan Allen Global, Inc. (incorporated by reference to Exhibit 3(f) to the Registration
Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Restated Certificate of Incorporation of Ethan Allen Inc. (now known as, Ethan Allen Retail, Inc.)
(incorporated by reference to Exhibit 3(g) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Amendment of Restated Certificate of Incorporation of Ethan Allen Inc. (now known as
Ethan Allen Retail, Inc.) as of June 29, 2005 (incorporated by reference to Exhibit 3(g)-1 to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Amended and Restated By-laws of Ethan Allen Inc. (now known as Ethan Allen Retail, Inc.)
(incorporated by reference to Exhibit 3(h) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Incorporation of Ethan Allen Manufacturing Corporation (now known as Ethan Allen
Operations, Inc.) (incorporated by reference to Exhibit 3(i) to the Registration Statement on Form S-4
of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Amendment of Certificate of Incorporation of Ethan Allen Manufacturing Corporation
(now known as, Ethan Allen Operations, Inc.) as of June 29, 2005 (incorporated by reference to Exhibit
3(i)-1 to the Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on
February 3, 2006)
By-laws of Ethan Allen Manufacturing Corporation (now known as, Ethan Allen Operations, Inc.)
(incorporated by reference to Exhibit 3(j) to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Formation of Ethan Allen Realty, LLC (incorporated by reference to Exhibit 3(k) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Limited Liability Company Operating Agreement of Ethan Allen Realty, LLC (incorporated by reference
to Exhibit 3(l) to the Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC
on February 3, 2006)
Amendment No. 1 to Operating Agreement of Ethan Allen Realty, LLC as of June 30, 2005
(incorporated by reference to Exhibit 3(l)-1 to the Registration Statement on Form S-4 of Ethan Allen
Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Incorporation of Lake Avenue Associates, Inc. (incorporated by reference to Exhibit 3(m)
to the Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3,
2006)
60
3 (n)
3 (o)
3 (p)
10 (a)
10 (b)
10 (c)
10 (d)
10 (d)-1
10 (d)-2
10 (d)-3
10 (d)-4
10 (d)-5
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
By-laws of Lake Avenue Associates, Inc. (incorporated by reference to Exhibit 3(n) to the Registration
Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Certificate of Incorporation of Manor House, Inc. (incorporated by reference to Exhibit 3(o) to the
Registration Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Restated By-laws of Manor House, Inc. (incorporated by reference to Exhibit 3(p) to the Registration
Statement on Form S-4 of Ethan Allen Global, Inc. filed with the SEC on February 3, 2006)
Restated Directors Indemnification Agreement dated March 1993, among the Company and Ethan
Allen and their Directors (incorporated by reference to Exhibit 10(c) to the Registration Statement on
Form S-1 of the Company filed with the SEC on March 16, 1993)
The Ethan Allen Retirement Savings Plan as Amended and Restated, effective January 1, 2006
(incorporated by reference to Exhibit 10(b)-7 to the Quarterly Report on Form 10-Q of the Company
filed with the SEC on November 5, 2007
Sales Finance Agreement, dated June 25, 1999, between the Company and MBNA America Bank, N.A.
(incorporated by reference to Exhibit 10(j) to the Annual Report on Form 10-K of the Company filed
with the SEC on September 13, 2000)
Second Amended and Restated Private Label Consumer Credit Card Program Agreement, dated as of
July 23, 2007, by and between Ethan Allen Global, Inc., Ethan Allen Retail, Inc. and GE Money Bank
(incorporated by reference to Exhibit 10(e)-3 to the Quarterly Report on Form 10-Q of the Company
filed with the SEC on November 5, 2007)(confidential treatment granted under Rule 24b-2 as to
certain portions which are omitted and filed separately with the SEC)
First Amendment to Second Amended and Restated Private Label Consumer Credit Card Program
Agreement, dated as of July 25, 2008, by and between Ethan Allen Global, Inc., Ethan Allen Retail, Inc.
and GE Money Bank (incorporated by reference as Exhibit 10(e)-1 to the Quarterly Report on Form 10-
Q of the Company filed with the SEC on May 10, 2010)
Second Amendment to Second Amended and Restated Private Label Consumer Credit Card Program
Agreement, dated as of February 16, 2010, by and between Ethan Allen Global, Inc., Ethan Allen Retail,
Inc. and GE Money Bank (incorporated by reference as Exhibit 10(e)-2 to the Quarterly Report on Form
10-Q of the Company filed with the SEC on May 10, 2010) (confidential treatment granted under Rule
24b-2 as to certain portions which are omitted and filed separately with the SEC)
Third Amendment to Second Amended and Restated Private Label Consumer Credit Card Program
Agreement, dated as of June 30, 2011, by and between Ethan Allen Global, Inc., Ethan Allen Retail, Inc.
and GE Money Bank (incorporated by reference to Exhibit 10(e)-3 to the Quarterly Report on Form 10-
Q of the Company filed with the SEC on November 3, 2010) (confidential treatment under Rule 24b-2
requested as to certain portions which are omitted and filed separately with the SEC)
Fourth Amendment to Second Amended and Restated Private Label Consumer Credit Card Program
Agreement dated as of January 1, 2014, by and between Ethan Allen Global, Inc., Ethan Allen Retail,
Inc., and GE Capital Retail Bank (incorporated by reference to Exhibit 10(d)-4 to the Quarterly Report
on Form 10-Q of the Company filed with the SEC on January 31, 2014) (confidential treatment
requested under Rule 24b-2 as to certain portions which are omitted and filed separately with the
SEC)
Fifth Amendment to Second Amended and Restated Private Label Consumer Credit Card Program
Agreement effective as of July 1, 2015, by and between Ethan Allen Global, Inc., Ethan Allen Retail,
Inc., and Synchrony Bank (incorporated by reference to Exhibit 10.(D)-5 to the Annual Report on Form
10-K of the Company filed with the SEC on August 12, 2015) (confidential treatment requested under
Rule 24b-2 as to certain portions which are omitted and filed separately with the SEC)
61
10 (e)
10 (e)-1
10 (e)-2
10 (f)-1
10 (f)-2
10 (f)-3
10 (f)-4
10 (f)-5
10 (f)-6
10 (g)
10 (g)-1
10 (g)-2
10 (g)-3
10 (g)-4
10 (g)-5
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Employment Agreement between the Company and M. Farooq Kathwari dated October 1, 2015
(incorporated by reference to Exhibit 10.1 to the Company’s Current Repot on Form 8-K filed with the
SEC on October 2, 2015)
Form of Performance-Based Stock Unit Agreement (incorporated by reference to Exhibit 10.2 to the
Company’s Current Repot on Form 8-K filed with the SEC on October 2, 2015)
Change in Control Severance Plan (incorporated by reference to Exhibit 10.3 to the Company’s Current
Repot on Form 8-K filed with the SEC on October 2, 2015)
Credit Agreement, dated as of May 29, 2009, among Ethan Allen Global, Inc., Ethan Allen Interiors Inc.,
J.P. Morgan Chase Bank, N.A., and Capital One Leverage Finance Corp (confidential treatment
requested as to certain portions (Incorporated by reference to Exhibit 10(g)-2 to the Annual Report on
Form 10-K of the Company filed with the SEC on August 24, 2009)
Amendment No. 1, dated as of October 23, 2009 to the Credit Agreement dated May 29, 2009, among
Ethan Allen Global, Inc., Ethan Allen Interiors Inc., J.P.Morgan Chase Bank, N.A., and the lenders
thereunder (incorporated by reference to the Quarterly Report on Form 10-Q of the Company filed
with the SEC on November 9, 2009).
Amendment No. 2, dated as of March 25, 2011, to the Credit Agreement dated May 29, 2009, among
Ethan Allen Global, Inc., Ethan Allen Interiors Inc., J.P.Morgan Chase Bank, N.A., and Wells Fargo Bank,
National Association (incorporated by reference to the Quarterly Report on Form 10-Q of the
Company filed with the SEC on May 5, 2011)
Amended and Restated Credit Agreement, dated October 21, 2014, among Ethan Allen Global, Inc.,
Ethan Allen Interiors Inc., J.P. Morgan Chase Bank, N.A., and Capital One, National Association
(incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K of the Company
filed with the SEC on October 22, 2014)
Amendment No. 2 Dated as of September 10, 2015 to Amended and restated credit agreement dated
as of October 21, 2014 among Ethan Allen Global, Inc., and J.P. Morgan Chase Bank, N.A. as
Administrative Agent and Syndication Agent, and Capital One, National Association as Documention
Agent dated as of October 21, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s
QuarterlyRepot on Form 10-Q filed with the SEC on September 11, 2015)
Amendment No. 3, dated as of January 22, 2016, to the Amended and Restated Credit Agreement
dated as of October 21, 2014 among Ethan Allen Global, Inc., Ethan Allen Interiors Inc., J.P.Morgan
Chase Bank, N.A. and Capital One, National Association (incorporated by reference to the Company’s
Quarterly Report on Form 10-Q filed with the SEC on January 27, 2016).
Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10(f) to the
Current Report on Form 8-K of the Company filed with the SEC on November 19, 2007)
Form of Option Agreement for Grants to Independent Directors (incorporated by reference to Exhibit
10(h)-4 to the Annual Report on Form 10-K of the Company filed with the SEC on September 13, 2005)
Form of Option Agreement for Grants to Employees (incorporated by reference to Exhibit 10(h)-5 to
the Annual Report on Form 10-K of the Company filed with the SEC on September 13, 2005
Form of Restricted Stock Agreement for Executives (incorporated by reference to Exhibit 10(f)-1 to the
Current Report on Form 8-K of the Company filed with the SEC on November 19, 2007)
Form of Restricted Stock Agreement for Directors (incorporated by reference to Exhibit 10(f)-2 to the
Current Report on Form 8-K of the Company filed with the SEC on November 19, 2007)
Form of performance condition option agreement for employees (incorporated by reference to Exhibit
10(g)-5 to the Quarterly Report on Form 10-Q of the Company filed with the SEC on May 1, 2014)
62
21
23
31.1
31.2
*
32.1
*
32.2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
List of wholly-owned subsidiaries of the Company
Consent of KPMG LLP
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB
XBRL Taxonomy Extension Labels Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
* Furnished herewith.
63
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
DATE: August 8, 2016
DATE: August 8, 2016
ETHAN ALLEN INTERIORS INC.
(Registrant)
By/s/ M. Farooq Kathwari
(M. Farooq Kathwari)
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
By/s/ Corey Whitely
(Corey Whitely)
Executive Vice President, Administration, Chief Financial Officer and Treasurer
(Principal Financial Officer)
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below hereby constitutes and appoints M. Farooq Kathwari and Corey
Whitely, and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full power of substitution and resubstitution, for
him or her and in his or her name, place and stead, in any and all capacities, to (i) act on, sign and file with the Securities and Exchange Commission any
and all amendments to this Report together with all schedules and exhibits thereto, (ii) act on, sign and file with the Securities and Exchange Commission
any and all exhibits to this Report and any and all exhibits and schedules thereto, (iii) act on, sign and file any and all such certificates, notices,
communications, reports, instruments, agreements and other documents as may be necessary or appropriate in connection therewith and (iv) take any
and all such actions which may be necessary or appropriate in connection therewith, granting unto such agents, proxies and attorneys-in-fact, and each of
them individually, full power and authority to do and perform each and every act and thing necessary or appropriate to be done, as fully for all intents and
purposes as he or she might or could do in person, and hereby approving, ratifying and confirming all that such agents, proxies and attorneys-in-fact, any
of them or any of his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
/s/ M. Farooq Kathwari
(M. Farooq Kathwari)
/s/ Corey Whitely
(Corey Whitely)
/s/ John S. Bedford
(John S. Bedford)
/s/ James B. Carlson
(James B. Carlson)
/s/ Clinton A. Clark
(Clinton A. Clark)
/s/ John J. Dooner Jr.
(John J. Dooner Jr.)
/s/ Domenick J. Esposito
(Domenick J. Esposito)
/s/ Mary Garrett
(Mary Garrett)
/s/ James W. Schmotter
(James W. Schmotter)
/s/ Tara I. Stacom
(Tara I. Stacom)
Date: August 8, 2016
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President, Administration,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Vice President, Corporate Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
64
CORPORATE DATA
Corporate Headquarters
ETHAN ALLEN INTERIORS INC.
ETHAN ALLEN DRIVE
DANBURY, CT 06811
203.743.8000
ETHANALLEN.COM
Independent Registered
Public Accounting Firm
KPMG LLP
3001 SUMMER STREET
STAMFORD, CT 06905
203.356.9800
Investor Relations
COREY WHITELY
EXECUTIVE VICE PRESIDENT,
ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND TREASURER
203.743.8517
CWHITELY@ETHANALLENINC.COM
Stock Exchange Listing
NEW YORK STOCK EXCHANGE
ETHAN ALLEN INTERIORS INC.
TRADING SYMBOL: ETH
Transfer Agent
COMPUTERSHARE INVESTOR SERVICES, LLC
211 QUALITY CIRCLE, SUITE 210
COLLEGE STATION, TX 77845
COMPUTERSHARE.COM/INVESTOR
DIRECTORS
as of August 31, 2016
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
OFFICERS
as of August 31, 2016
James B. Carlson
PARTNER,
MAYER BROWN, LLP
Clinton A. Clark
MEMBER,
CLARK QUALITY CONSTRUCTION, LLC
John J. Dooner Jr.
CHAIRMAN, THE DOONER GROUP
Domenick J. Esposito, CPA
CEO, ESPOSITO CEO2CEO
Mary Garrett
RETIRED, FORMER VICE PRESIDENT,
MARKETING AND COMMUNICATIONS
IBM GLOBAL SALES AND DISTRIBUTION
James W. Schmotter
PRESIDENT EMERITUS,
WESTERN CONNECTICUT
STATE UNIVERSITY
Tara I. Stacom
EXECUTIVE VICE CHAIRMAN
CUSHMAN & WAKEFIELD
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Daniel M. Grow
SENIOR VICE PRESIDENT,
BUSINESS DEVELOPMENT
John S. Bedford II
VICE PRESIDENT,
CORPORATE CONTROLLER
Eric D. Koster
VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
Cynthia Bero**
VICE PRESIDENT, RETAIL DIVISION
Tracy Paccione
VICE PRESIDENT, MERCHANDISING
Kathy Bliss**
VICE PRESIDENT, RETAIL DIVISION
David R. Burton**
VICE PRESIDENT, RETAIL DIVISION
Bridget DePasquale*
VICE PRESIDENT, MARKETING SERVICES
John Durkott**
VICE PRESIDENT, RETAIL DIVISION
Amy Franks**
VICE PRESIDENT, RETAIL DIVISION
Don Garrett***
VICE PRESIDENT,
CASE GOODS MANUFACTURING
Philip Greenwald**
VICE PRESIDENT, REAL ESTATE
Robin van Puyenbroeck*
VICE PRESIDENT,
BUSINESS DEVELOPMENT
Christopher H. Robertson*
VICE PRESIDENT, LOGISTICS
Craig Stout*
VICE PRESIDENT,
CASE GOODS MERCHANDISING
Clifford Thorn***
VICE PRESIDENT,
UPHOLSTERY MANUFACTURING
Corey Whitely
EXECUTIVE VICE PRESIDENT,
ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND TREASURER
Design: Ethan Allen Global, Inc.
*Ethan Allen Global, Inc.
**Ethan Allen Retail, Inc.
***Ethan Allen Operations, Inc.
ethanallen.com ©2016 Ethan Allen Global, Inc.