ANNUAL REPORT
2017
FIN A N CIA L
HIG H LIG H TS
STATEMENT OF OPERATIONS DATA
2017
2016
2015
Net sales
$763,385
$794,202
$754,600
Gross profit
$419,723
$442,236
$411,163
Operating income
$57,950
$89,179
$65,934
Net income
$36,194
$56,637
$37,142
PER SHARE DATA
Net income per diluted share
$1.29
$2.00
$1.27
Diluted weighted average
common shares outstanding
BALANCE SHEET DATA
27,958
28,324
29,182
Cash and securities (a)
$65,031
$60,479
$86,390
Working capital
$116,653
$124,857
$130,012
Current ratio
1.92 TO 1
2.01 TO 1
1.92 TO 1
Total assets
$568,222
$577,409
$605,977
Total debt, including
capital lease obligations
$14,339
$41,838
$76,237
Shareholders’ equity
$400,706
$391,998
$370,258
Debt as % of equity
Debt as % of capital
3.6%
3.5%
10.7%
20.6%
9.6%
17.1%
CASH RETURNED TO SHAREHOLDERS
Dividends paid
$20,031
$16,646
$13,348
Cost of shares repurchased
$10,246
$19,346
$16,470
Number of shares repurchased
357,363
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,
We are pleased with the excellent progress we made during
fiscal 2017. We strengthened our offerings, service, and
marketing programs as well as our environmental and social
responsibility focus. It is clear that the initiatives we have
implemented over the past couple of years have positioned
us for growth and enhanced shareholder returns.
We achieved net sales for fiscal 2017 of $763.4 million,
operating income of $58.0 million, net income of $36.2
million, and earnings per diluted share of $1.29. We also
returned $30.3 million to shareholders in share repurchases
and dividends.
Our strategic focus continues to center on creating an
experience that “wows” the customer.
EXPANDED OFFERINGS
During fiscal 2017, we continued to introduce stylish new
products that infused fashion with quality and value. We
introduced several new projections, including Santa Monica,
Brooklyn, and our Ethan Allen | Disney collection.
Vertical integration gives us control over every aspect of
our business, from designing our products to manufacturing,
retailing, and delivering them to our clients, all with
shortened delivery times.
CUSTOMER EXPERIENCE THAT D IF FE RENT I AT ES
Ethan Allen is uniquely positioned to provide interior design
service, with more than 2,000 interior design professionals
throughout our global network of 148 company-operated
and 155 independently owned Design Centers.
We continue to reposition our Design Centers with 24%
new or relocated within the past five years. Our new locations
average less than 10,000 square feet and incorporate
technology to accelerate the design and selling processes.
Another key service focus is our Premier In-Home Delivery,
a white-glove delivery service offered at one national price—
a major competitive advantage.
COMBINING TECHNO LOGY W I TH
PERSONAL SERVICE
Combining technology with personal service is one of the
major differentiators of great customer service. We continue
to refine a dynamic omnichannel experience for our clients.
This year
we empowered
our designers with
the ability to interact
with our clients online
through a new Live Chat tool,
made major enhancements to
ethanallen.com (including adding
3D product views), and launched our
new Ethan Allen | Disney website.
EXP A NDED MAR KETI NG
With our major product refresh complete,
we greatly expanded our marketing, increasing
advertising by more than 16%. We launched a major
national television advertising program and expanded
our digital marketing. Our marketing focused on our core
messages of interior design service, style, quality, and value.
ENV IR ONMENT A L & SO CIA L R ESP O NS I BILI TY
Vertical integration makes it possible for us to establish and
deliver on commitments to environmental stewardship,
sustainability, health and safety, and social responsibility.
New manufacturing technology, combined with the talents
of our craftspeople, has made our manufacturing division—
the division that is also the base of our stewardship and
social responsibility platform—even stronger.
The continued strengthening of our vertically integrated
structure reflects 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 2018 and beyond.
FAROOQ KATHWARI
Chairman, President and CEO
Ethan Allen Interiors Inc.
STRE N G T H E NIN G
O U R F O U N D ATIO N
STRE N G T H E NIN G
O U R F O U N D ATIO N
After 85 years in business, the name “Ethan Allen” means
craftsmanship, service, and style. We begin our journey
toward the future anchored in—and extraordinarily proud of—
that established brand identity.
SU PE RIOR CRAFT SM AN SHI P
In the 1930s, Nat Ancell and Ted Baumritter purchased a
sawmill in Vermont and began making their own furniture.
They produced a 28-piece line of Early American-style
furniture and named their business after Revolutionary
War icon Ethan Allen.
Even though we operate in a high-inventory, commodity-
driven world, we still make approximately 75 percent
of our products in our North American workshops. This
supply chain efficiency gives us a competitive advantage
in terms of both cost and market positioning at a time
when U.S. market conditions favor renewed emphasis on
domestic manufacturing.
Factors like increasing home values and improved stock
market returns are boosting consumer confidence,
making big-ticket purchases like home furnishings more
appealing. Our manufacturing standards equip us to
drive quality to the highest level, which combines with
our complimentary design service to position us well.
Many Ethan Allen products are made to order, a model
that delivers exceptional quality. In light of competitive
realities, we continue to expand product lines that provide
our high standard of special order craftsmanship—the
hallmark of Ethan Allen—within shorter delivery lead times.
For example, to craft our Custom Quick Ship Upholstery
items, we keep some of our most popular fabrics and
leathers in stock, with the frames built and upholstered
by hand in our North American workshops and delivered
to the customer within 30 days. Today, 85% of our
case goods and 20% of our sofas are available for fast
shipment, and we’re expanding the number of hard
accents, soft accents, and rugs that can be delivered
within a shorter timeframe.
Our craftsmanship is a key differentiator for Ethan Allen
within the current market environment. When we select
international partners, we choose businesses that share
our commitment to quality. From our case goods, to
our hand-tailored upholstery, to even our artwork, hand-
framed by artisans in our Passaic, New Jersey, workshop—
products bearing the Ethan Allen name are built to last.
2%
CANADA
63%
UNITED STATES
303 DESIGN CENTERS
148 COMPANY OPER ATED
155 INDEPENDENTLY OPER ATED
35%
INTERNATIONAL
SIN GU LAR SER VI CE
In 1962, Ethan Allen launched a new kind of furniture
shopping experience: the gallery. We displayed our
furnishings as projections of rooms, professionally
designed with combinations of furnishings and
accessories that complemented one another. Shopping
became a transformative experience when consumers
could discover the room of their dreams and re-create
it in their own homes.
Building on the customer experience created in those
early galleries, our Design Center network—303
worldwide and still growing strong—continues to evolve.
We incorporate interactive touchscreen technology and
mobile tablets to make the design experience tactile and
collaborative, and we’re exploring new technologies like
augmented reality for an even more personal, immersive
experience. Our complimentary design service is a
major market differentiator; customers can obtain free
assistance in their homes, in our Design Centers, and
online via Live Chat.
When customers purchase Ethan Allen furniture, they
receive it via our Premier In-Home Delivery service.
After each piece is crafted, it’s sent to a distribution or
service center for careful inspection and then transported
to customers’ homes. As part of our “white glove” service,
we provide on-site assembly and disposal of select items
that have been replaced. In addition, our designers can
visit sites for complimentary premeasure appointments,
ensuring a seamless process on delivery day.
SKI LLED TEAM MEMBERS
Our talented team of design consultants and interior design affiliates have
decades of experience and multiple industry awards under their belts.
They are the most visible ambassadors of the Ethan Allen brand, and we
encourage them to take an entrepreneurial approach to marketing and
building their client base.
Recognizing our talent pool as a competitive advantage, we have expanded
our efforts to promote individual designers and their work. We use email
marketing, social media, video, image-driven blog interviews, and dedicated
online portfolio pages to highlight their achievements and artistry. Additionally,
we have created video, imagery, and copy that recognizes the work of people in
our nine manufacturing plants, three distribution centers, and 67 retail division
and independent retail service centers. We honor those who have spent their
careers crafting, delivering, and ensuring the quality of Ethan Allen products.
Additionally, as part of the vertical integration provided by our manufacturing,
distribution, and retail operations, we conduct our own marketing and advertising
efforts. As we drive new and repeat customers into our Design Centers, we rely
on artists, photographers, writers, and analysts who understand the changing
marketplace and embrace new mediums of communicating with customers
—yet remain firmly rooted in the brand identity that makes Ethan Allen a
household name.
G
C
H
N
DIN
U R R E A
E X P A
O
©Disney
When we shifted away from Early American style in the 1990s,
we proved we could evolve as our customer base changed.
We recognize a similar need for change now, and as generations
come and go, we will continue to adapt to the times.
©Disney
B U ILD ING NEW RELAT IONSH I P S
We believe our core values of craftsmanship, service,
and skill are as valuable today as they were 85 years
ago. The mediums through which we communicate our
value, however, have shifted to accommodate the ways
consumers absorb content. We balance the preferences of
our core customers with the necessity of connecting with
a new generation.
We have always been a business that builds lifelong
relationships with our customers rather than following
a high-cost, price-sensitive mass market strategy. This
emphasis on relationships guides our digital lead
generation and social networking efforts, which are
visible in our revamped, visually driven blog, entitled
“The Daily Muse,” and our presence on multiple social
networks and on Houzz.com. We encourage our designers
to engage in grassroots marketing, and we recognize their
most effective efforts. We also promote user-generated
content, using the hashtag #EthanAllenDesign, a project
that has given even our direct mail marketing a more
customer-focused angle.
Through television and direct mail, we connect with our
established customer segments; through our digital
efforts and fresh product lines, we’re establishing a new
community among millennials. As millennials begin
their families, we recognize an opportunity, and from
small initiatives like the use of Crypton® stain-resistant
fabrics to major product launches like Ethan Allen | Disney,
we’re seizing it.
Millennials are a diverse generation marked by a desire
to be treated as individuals, and Ethan Allen is poised to
deliver that experience. By emphasizing personalization and
customization rather than commodity furniture, by honoring
diversity in our product line, and by encouraging individual
expression through #HowIEthanAllen, we position Ethan
Allen as the go-to brand of a new generation.
Additionally, millennial consumers demand greater social
responsibility from the businesses they patronize. Our
emphasis on sustainability, covered in greater depth later
in this report, has long been a part of our company culture.
We further refined our approach through our partnership
with Disney, a long-recognized leader in corporate
social responsibility. Commitments to environmental
stewardship, safe processes, and social responsibility
are authentic to our business. They now offer the added
benefit of differentiating our business in the eyes of
millennial consumers.
PLAY I NG TO OUR STREN G TH S
The balance between brick-and-mortar and online shopping has been
shifting for many years. It's a reality reflected in the smaller average
footprints of our new Design Centers—8,700 average square feet for
Design Centers opened in the past three years versus 15,000 square feet
in years past. At the same time, we understand the tremendous value of
personal service, so many of our marketing efforts are designed to drive
traffic into our Design Centers.
During the second half of fiscal 2017, we launched a national television
advertising campaign to promote our diversity of style and the value of
our design service. We also deployed Live Chat, which makes designers
available online, adding a new level of simplicity and convenience for
our clients and fostering the designer/client connection.
Today, the majority of our customers initially seek us online through
both desktop and mobile channels. To adapt, we incorporated
responsive design into our e-commerce site and blog to ensure that
customers could interact with us using any available device or operating
system. Our emphasis on personal service is part of our identity, and
catering to customers as individuals is what sets us apart.
CONSOLIDATED SALES
& OPERATING MARGIN
Consolidated Net Sales
GAAP Operating Margin
Millions
$680
$700
$720
$740
$760
$780
$800
2017
2016
2015
2014
2013
7.6%
$763.4
11.2%
$794.2
$754.6
8.7%
$746.7
9.3%
0%
2%
4%
6%
8%
10%
12%
$729.1
8.3%
TOTAL SPECIAL & REGULAR
DIVIDENDS PAID
Cash Dividends Paid—Total
Dividend Yield
Millions
$0
$5
$10
$15
$20
$25
2017
2016
2015
2014
2013
$20.0
2.3%
$16.6
1.9%
$13.3
1.9%
$11.3
1.6%
0%
.5%
1%
1.5%
2%
2.5%
1.3%
$22.2
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‐K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
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)
Delaware
06‐1275288
(State or other jurisdiction of incorporation or organization)
(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
Name of Each Exchange On Which Registered
Common Stock, $.01 par value 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, smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company”in Rule 12b‐2 of the Exchange Act:
Large accelerated filer
Non‐accelerated filer
Emerging growth company [ ]
[X]
[ ] Do not check if smaller reporting company)
Accelerated filer
Smaller reporting company
[ ]
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
[ ]
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 voting and non‐voting stock held by non‐affiliates of the registrant on December 31, 2016, the last business
day of the registrant’s most recently completed second fiscal quarter, was approximately $703,752,000. As of July 31, 2017, there were
27,447,215 shares of the registrant’s common stock, par value $.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Certain designated information contained in the registrant’s definitive Proxy Statement for the
2017 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 to the extent described herein.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Item
Page
PART I
Item 1.
Business ................................................................................................................................................................... 3
Item 1A.
Risk Factors .............................................................................................................................................................. 9
Item 1B.
Unresolved Staff Comments .................................................................................................................................. 13
Item 2.
Properties............................................................................................................................................................... 13
Item 3.
Legal Proceedings .................................................................................................................................................. 14
Item 4.
Mine Safety Disclosures ......................................................................................................................................... 15
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..................................................................................................................................................... 15
Item 6.
Selected Financial Data .......................................................................................................................................... 16
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operation .................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................................................ 28
Item 8.
Financial Statements and Supplementary Data ..................................................................................................... 28
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................. 50
Item 9A.
Controls and Procedures ........................................................................................................................................ 51
Item 9B.
Other Information .................................................................................................................................................. 51
PART III
Item 10.
Directors, Executive Officers and Corporate Governance ..................................................................................... 52
Item 11.
Executive Compensation ........................................................................................................................................ 52
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters .............................................................................................................................................. 52
Item 13.
Certain Relationships and Related Transactions, and Director Independence ..................................................... 52
Item 14.
Principal Accounting Fees and Services ................................................................................................................ 52
PART IV
Item 15.
Exhibits and Financial Statement Schedules .......................................................................................................... 53
Item 16.
Form 10‐K Summary .............................................................................................................................................. 56
SIGNATURES............................................................................................................................................................................... 57
2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 1. Business
Overview
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 in 1932, today we are a leading
international home fashion brand doing business in North America, Asia, the Middle East and Europe. We are vertically
integrated from design through delivery, affording our clientele a value proposition of style, quality and price. 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 retail 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
in Mexico and one in Honduras. Approximately 75% of the products sold by the Company are manufactured in our North
American plants.
Available 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 Securities and Exchange Commission (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.
Operating Segments
Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that
operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of
home furnishings and accents more effectively while controlling quality and cost. 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. For certain 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.
As of June 30, 2017, the Company operated 148 design centers (our retail segment) and our independent retailers operated 155
design centers. 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
2017. Our wholesale segment net sales to independent retailers accounted for 21%, including approximately 11.9% of our
consolidated net sales in fiscal 2017 to ten of our largest independent retailers, operating 101 design centers.
Wholesale Segment Overview:
The wholesale segment, principally involved in the development of the Ethan Allen brand, encompasses all aspects of design,
manufacture, sourcing, marketing, sale, and distribution of our broad range of home furnishings and accents. Wholesale
revenue is generated upon the sale and shipment of our products to our retail network of independently operated design
centers and Company operated design centers.
Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods,
upholstery, and 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,
3
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.
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
2016
34%
32%
48%
51%
18%
17%
2017
33%
51%
16%
100%
100%
100%
We offer a mix of custom made‐to‐order and in‐stock product programs. Our wholesale backlogs as of June 30, 2017 and June 30,
2016, were approximately $47.4 million and $40.3 million respectively. Because the size of our backlog at a given time may not be
indicative of our future revenues, we do not rely entirely on backlogs to predict future revenues.
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.
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.
Retail Segment Overview:
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 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, including relocated design centers
provided the original and relocated design center location had been operating for at least 15 months on a combined basis. During
the first three months of operations of newly opened 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. During fiscal 2017, we opened
six new design centers, two of which were relocations. The geographic distribution of retail design center locations is included
under Item 2 of Part I of this Annual Report.
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
Products
Fi s ca l Yea r Ended June 30,
2016
2015
32%
31%
45%
47%
23%
22%
2017
30%
48%
22%
100%
100%
100%
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. One such example of this strategy is our new Ethan Allen | Disney product program, launched during fiscal
2017. 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
4
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
75% of our furniture is built by artisans, 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 fashion leader in the home furnishing industry.
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.
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 our
products 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. 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.
Environmental Sustainability and Social Responsibility
We are focused on environmental and social responsibility and incorporating uniform social, environmental, 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 our domestic manufacturing, distribution and service center facilities, and
have expanded these efforts to our retail design centers, which have now been registered in EFEC. Our Mexico and Honduras
facilities have been audited and are registered under the AHFA's EFEC program. Our domestic manufacturing, distribution
and service centers have also achieved Sustainable by Design (SBD) registration status under the EFEC program. SBD provides
a framework for home furnishings companies to create and maintain a corporate culture of conservation and environmental
stewardship by integrating socio‐economic policies and sustainable business practices into their manufacturing operations
and sourcing strategies.
The Company requires its sourcing facilities that manufacture Ethan Allen branded products to implement a labor compliance
program and meet or exceed the standards established for preventing child labor, involuntary labor, coercion & harassment,
discrimination, and restrictions to freedom of association. These facilities must also provide a safe and healthy environment
in all workspaces, compliance with all local wage and hour laws and regulations, compliance with all applicable environmental
laws and regulations, and they must authorize Ethan Allen and/or its designated agents (including third‐party auditing
companies) to engage in monitoring activities to confirm compliance.
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
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 products. 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 retail network of Company and independently operated retail
service centers. Retail service centers prepare products for delivery into clients’ homes. At June 30, 2017, the Company
operated retail design centers were supported by 14 Company operated retail service centers and 15 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 segment 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 multifaceted, multichannel marketing and advertising strategies drive traffic both to design centers and our digital
mediums. We believe these efforts give us a strong competitive advantage in the home furnishings industry while benefiting
our worldwide retail network of approximately 300 design centers as well as the independent members of our Interior Design
Affiliate program.
Our team of advertising specialists works to position Ethan Allen as an authority on design, a leader in exemplary service, and
a source of style for everyone. In our marketing campaigns, we capitalize on Ethan Allen's strong brand equity, finding creative
and compelling ways to promote our tremendous range of products, services, special programs, and custom options. We
deliver these messages in a variety of ways – locally, nationally, and globally – to connect and engage with our target audience
and drive sales.
As digital channels have taken on increasing importance, we continue to expand our digital marketing reach – supplementing
traditional advertising strategies. Our channels include digital and social media, national and local television, direct mail,
national and local newspapers, local and satellite radio, and local shelter magazines. Additionally, our robust email marketing
program delivers inspiration, sales messages, design solutions, and product information to an ever‐expanding database of
current and potential clients.
Our direct mail magazine, which emphasizes the breadth of our products and services, is one of Ethan Allen's key marketing
tools. We produce these magazines multiple times a year; in fiscal 2017, we distributed approximately 21 million copies. We
distribute them to targeted marketing segments based on data collected internally and through independent market
research. We continually refine our direct mail marketing lists to target clients and potential clients who are most likely to
purchase, which provides better returns on direct mail expenditures.
Our websites – ethanallen.com, ethanallen.ca, ethanallen.com/disney, and ethanallen.ca/disney – undergo continuous
conversion optimization to boost sales as clients shop, design, and purchase. We also have a web presence to support our
international licensees – in some cases, using local languages; in all cases, linking back to ethanallen.com. These websites
position Ethan Allen in a manner consistent with our brand yet specific to the region.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
A robust and informative Extranet connects our retail network, keeping the lines of communication open among our retailers,
design professionals, merchandisers, trainers, and corporate personnel. Information about every aspect of Ethan Allen's retail
business is shared here, including advertising materials, prototype floor plan displays, and extensive product details.
Retail Design Centers
Ethan Allen design centers are typically located in busy retail settings as freestanding destinations or as part of town centers,
lifestyle centers, suburban strip malls or shopping malls, depending upon the real estate opportunities in a particular market.
Our design centers average approximately 15,000 square feet in size with 76% between 15,000 and 25,000 square feet and
20% less than 15,000 square feet and 4% 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. As
of June 30, 2017 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
centers. 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 strive to maintain consistency of presentation throughout our retail design centers 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 exterior
facades and signage. The establishment of these standards has helped position Ethan Allen as a leader in the home furnishings
industry.
We continue to strengthen the Ethen Allen brand 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, 2017 and June 30, 2016, the Company, through its subsidiaries, had approximately 5,200 employees. The majority of
our employees are employed on a fulltime basis and we believe we maintain good relationships with our employees, none of
whom are represented by unions.
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,
low priced and low service retailers, we believe consumers are spending more time window shopping on the internet and are
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 design centers by combining technology with excellent personal service. Through our digital
mediums, 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 interior design professionals.
Consumers also have the ability to immediately chat on‐line with one of our qualified design consultants. This complimentary
direct contact with one of our knowledgable interior designers 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, (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 72
Chairman of the Board, President and Chief Executive Officer since 1988
Daniel M. Grow, age 71
Senior Vice President, Business Development since February 2015
Vice‐President, Business Development from 2009 to 2015
Eric D. Koster, age 70
Vice‐President, General Counsel and Secretary since April 2013
Private practice prior to joining the Company in April 2013
Tracy Paccione, age 51
Vice‐President, Merchandising since June 2009
Clifford Thorn, age 65
Vice‐President, Upholstery Manufacturing since May 2001
Corey Whitely, age 57
Executive Vice‐President, Administration, Chief Financial Officer and Treasurer since July 2014
Executive Vice‐President, Operations from October 2007 through July 2014
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 occurs, the impact on our business, including our financial
condition, results of operations, and cash flows could be adverse.
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 independently operated and 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, nationally or globally, 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 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, digital, 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 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
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
The Company’s business may be adversely affected by changes in U.S. policy related to imported merchandise.
A significant amount of the Company’s merchandise is sourced from outside of the United States. The U.S. government is
considering proposals for substantial changes to its trade and tax policies, which could include import restrictions, increased
import tariffs, changes to or withdrawal from existing trade agreements, and border‐adjustment taxes among other possible
measures. Material changes in these policies could increase the Company’s tax obligations or require the Company to increase
prices to customers, which would likely adversely affect sales. Any significant change in U.S. policy related to imported
merchandise could have a material adverse effect on the Company’s business and financial results.
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. 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.
Our number of manufacturing and logistics sites may increase our exposure to business disruptions and could result in
higher transportation costs.
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 or deliver our products in a timely manner 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.
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.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
The Company's sales and operating results could be adversely affected by product safety concerns.
If the Company's merchandise offerings do not meet applicable safety standards or consumers' expectations regarding safety,
the Company could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that
give rise to actual, potential or perceived product safety concerns could expose the Company to government enforcement
action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could negatively
affect the Company's business and results of operations.
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 effects 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 had a material impact 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.
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 employees and
upon the continued contributions of these individuals. We cannot provide assurance that we will be successful in attracting
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.
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
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
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.
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 have a material negative change, 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, the tightening of credit
markets may restrict the ability and willingness of customers to make purchases.
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.
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.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
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. 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 1,250,000 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. During fiscal 2017, the Company’s 300,000 square foot expansion at our upholstery plant in Mexico was completed.
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 11 retail service centers, totaling approximately 775,000 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 network for fiscal years ended June 30 are as follows:
13
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Fiscal 2017
Fis cal 2016
Independent
retailers
Company‐
operated
Total
Independent
retailers
Company‐
operated
Total
Retail Des ign Center location activity:
Balance at beginning of period
New locations
Closures
Transfers
Balance at end of period
Relocations (in new and clos ures)
Retail Des ign Center geographic locations :
United States
Canada
China
Other As ia
Europe
Middle East
Total
153
8
(5)
(1)
155
1
48
‐
82
12
6
7
155
143
6
(2)
1
148
2
296
14
(7)
‐
303
3
142
190
6
‐
‐
‐
‐
6
82
12
6
7
155
15
(16)
(1)
153
2
50
‐
83
11
2
7
144
10
(12)
1
143
6
299
25
(28)
‐
296
8
137
187
6
‐
‐
‐
‐
6
83
11
2
7
148
303
153
143
296
Of the 148 Company operated retail design centers, 49 of the properties are owned and 99 are leased, 17 of which are ground
leases. We own one and lease four additional retail properties, two of which are subleased to independent Ethan Allen
retailers, and three of which are subleased 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 our properties are well maintained and in good condition. We estimate that our manufacturing plants are
currently operating at approximately 61% 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. 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.
14
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 2017
Fi rs t Qua rter
Second Qua rter
Thi rd Qua rter
Fourth Qua rter
Fi s ca l 2016
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 Share
$
36.77
$
30.63
38.80
37.90
32.50
29.20
27.75
26.75
$
31.87
$
25.76
29.65
32.10
35.31
25.30
22.46
29.39
0.17
0.19
0.19
0.19
0.14
0.14
0.17
0.17
As of July 31, 2017, there were 255 shareholders of record of our common stock. Management estimates there are
approximately 9,000 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 15, 2017 and is incorporated herein by reference
in the introductory paragraph of Part III of this Annual Report.
Issuer Purchases of Equity Securities
During the fiscal year ended June 30, 2017 the Company repurchased 357,363 shares of our common stock at an average
price of $28.67 per share. Certain information regarding purchases of our common stock made by us during the three months
ended June 30, 2017 is as follows:
Number of
Sha res
Purcha s ed
Avera ge
Pri ce Pa i d
Per Sha re
‐
$
‐
186,167
$
27.62
63,496
$
27.35
249,663
$
27.55
Peri od
Apri l 2017
Ma y 2017
June 2017
Tota l
Tota l Number of
Sha res Purcha s ed
a s Pa rt of Publ i cl y
Announced
Pl a ns or Progra ms
Ma xi mum Number of
Sha res tha t Ma y Yet
Be Purcha s ed
Under the
Pl a ns or Progra ms
‐
186,167
63,496
249,663
1,650,160
1,463,993
1,400,497
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
15
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
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.
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
6/12
6/13
6/14
6/15
6/16
6/17
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, 2013 through 2017 that has been
derived from our consolidated financial statements. 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.
Dollar amounts are in thousands except per share data.
16
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Fi s ca l Yea r Ended June 30,
2017
2016
2015
2014
2013
$
763,385
$
794,202
$
754,600
$
746,659
$
729,083
343,662
351,966
343,437
340,163
330,734
361,773
353,057
345,229
336,860
337,912
57,950
955
56,995
20,801
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
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
a dmi ni s tra ti ve expens es
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)
Net i ncome
$
36,194
$
56,637
$
37,142
$
42,931
$
32,478
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
$
1.31
$
2.02
$
1.29
$
1.48
$
1.13
27,679
28,072
28,874
28,918
28,864
$
1.29
$
2.00
$
1.27
$
1.47
$
1.11
27,958
28,324
29,182
29,276
29,239
Ca s h di vi dends per s ha re
$
0.74
$
0.62
$
0.50
$
0.40
$
0.77
Other Informa ti on
Depreci a ti on a nd a morti za ti on
$
20,115
$
19,353
$
19,142
$
17,930
$
18,008
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
$
18,321
$
23,132
$
21,778
$
19,305
$
19,775
$
116,653
$
124,857
$
130,012
$
169,582
$
127,631
1.92 to 1
2.01 to 1
1.92 to 1
2.25 to 1
1.96 to 1
36.5%
35.6%
34.5%
31.2%
35.3%
Ba l a nce Sheet Da ta (a t end of peri od)
Tota l a s s ets
$
568,222
$
577,409
$
605,977
$
654,434
$
617,285
Tota l debt, i ncl udi ng ca pi ta l
l ea s e obl i ga ti ons
$
14,339
$
41,838
$
76,237
$
130,912
$
131,289
Sha rehol ders ' equi ty
$
400,896
$
392,202
$
370,535
$
367,467
$
334,357
Debt a s a percenta ge of equi ty
Debt a s a percenta ge of ca pi ta l
3.6%
3.5%
10.7%
9.6%
20.6%
17.1%
35.6%
26.3%
39.3%
28.2%
17
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. Actual results could differ materially from those anticipated in the forward‐looking statements due to a
number of risks and uncertainties including, but not limited to: competition from overseas manufacturers and domestic
retailers; our anticipating or responding to changes in consumer tastes and trends in a timely manner; our ability to maintain
and enhance our brand, marketing and advertising efforts and pricing strategies; 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; changes in U.S. policy related to imported merchandise; an economic downturn;
our limited number of manufacturing and logistics sites; fluctuations in the price, availability and quality of raw materials;
environmental, health and safety requirements; product safety concerns; disruption to our technology infrastructure
(including cyber attacks); increasing labor costs, competitive labor markets and our continued ability to retain high‐quality
personnel and risks of work stoppages; loss of key personnel; our ability to obtain sufficient external funding to finance our
operations and growth; access to consumer credit; the effect of operating losses on our ability to pay cash dividends; 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; 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 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 recognition
18
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
The recoverability of long‐lived assets is evaluated for impairment whenever events or changes in circumstances indicate that
we may not be able to recover the carrying amount of an asset or asset group. Our assessment of recoverability determines
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.
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 2017, 2016 and 2015, 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 2017, 2016, and 2015. 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 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%
19
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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
In this Item 7 of this Annual Report , unless otherwise noted, all comparisons are from the fiscal year ended June 30, 2017 to
the prior fiscal year ended June 30, 2016 ($ in millions except per share amounts).
A summary of our consolidated operations for the past three fiscal years is presented in the following table.
Fis 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
$
$
$
2017
763.4
419.7
361.8
58.0
36.2
1.29
78.6
$
$
%
100.0%
55.0%
47.4%
7.6%
4.7%
%
100.0%
55.7%
44.5%
11.2%
7.1%
$
$
$
2016
794.2
442.2
353.1
89.2
56.6
2.00
58.4
$
$
%
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
$
$
A summary of changes from the preceding fiscal year are presented in the following table.
Net sales
Operating income
Net income
Earnings per diluted share
Net cash provided by operating activities
Fiscal years ended June 30,
2017
2016
2015
‐3.9%
‐35.0%
‐36.1%
‐35.5%
34.7%
5.2%
35.3%
52.5%
57.5%
5.9%
1.1%
‐5.3%
‐13.5%
‐13.6%
‐8.0%
Beginning in the fall of 2014, we commenced a major transformation of our product offerings in several phases. We
introduced Casual Classics during the first phase in the fall of 2014. In the spring and summer of 2015, we launched the
second phase, Romantic Classics. We launched the third phase in the fall of 2015, during which we further developed
Romantic Classics. We further expanded our Casual Classics with three new design projections; Buckhead introduced in June
2016; Santa Monica introduced in July 2016; and Brooklyn introduced in August 2016. These new product offerings were
followed by the introduction of our Ethan Allen | Disney home line in November 2016. We believe that we are now well
positioned to benefit from this major product refresh. While we implement major product introductions, such as the
introductions described above, our wholesale segment experiences some disruptions in manufacturing as we change tooling
and manufacturing methods, build prototypes and then ramp up production. In our retail segment, some disruption also
20
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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. These disruptions may affect sales and expenses.
Our net sales decreased from the prior fiscal year, following three years of growth. While our new introductions and
marketing efforts have gained traction with consumers, the retail consumer market in the United States faced a difficult year.
Gross margin, while remaining at a high level historically, was below the prior year primarily due to an inventory write‐down
of $6.4 million during the third quarter of fiscal 2017. Operating expenses increased as a percentage of sales, mostly due to
a 16.5% increase in advertising expenses. This resulted in a net decrease in earnings per diluted share of $0.71, which followed
an increase of $0.73 in the previous fiscal year. Net cash provided by operating activities along with operating cash enabled
us to repurchase $10.2 million of our common stock under our share repurchase program, pay down $25.0 million of our
debt earlier than scheduled, and return $20.0 million in cash dividends to our shareholders. At June 30, 2017 we had total
cash and securities of $65.0 million, and working capital of $116.7 million.
The components of consolidated revenues and operating income (loss) by business segment are as follows (in millions):
Fiscal Year Ended June 30,
2017
2016
2015
Revenue:
Wholesale segment
Retail segment
Elimination of inter‐segment sales
Consolidated revenue
Operating income :
Wholesale segment
Retail segment
Adjustment for inter‐company profit (1)
Consolidated operating income
$
$
453.3
603.7
(293.6)
763.4
$
$
491.5
626.5
(323.8)
794.2
$
$
469.4
579.7
(294.5)
754.6
$
$
$
53.5
1.2
3.3
58.0
74.4
16.5
(1.7)
89.2
67.0
1.7
(2.8)
65.9
$
$
$
(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 preceding fiscal years are presented in the following
tables.
Wholesale segment
Revenue
Opera ti ng Income
Retail segment
Fi s ca l Yea r Ended June 30,
2016
2017
2015
‐7.8%
‐28.1%
4.7%
11.1%
3.5%
15.9%
Fi s ca l Yea r Ended June 30,
2016
2017
2015
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
‐3.6%
‐4.6%
‐0.6%
‐2.5%
‐92.7%
8.1%
8.3%
1.7%
1.8%
853.1%
‐0.2%
0.0%
3.9%
4.0%
‐83.6%
Business Results:
Our revenues are composed 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, 2017 included under Item 8 of this Annual Report.
Fiscal 2017 Compared to Fiscal 2016
Consolidated revenue was $763.4 million compared to $794.2 million. There was a year‐over‐year decline in sales in both
the wholesale and retail segments.
21
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Wholesale revenue decreased by $38.1 million, or 7.8%, to $453.3 million from $491.5 million. The year‐over‐year decrease
was attributable to lower sales to our Company operated design centers and domestic independent retailers, partly offset by
an increase to our international independent design centers, primarily in China. There were 303 design centers globally as of
June 30, 2017, an increase of seven. There was a net increase of two independently operated retail network locations, which
included a decrease of one legacy location in the U.S. and the purchase of one independently owned location by the Company,
bringing the total U.S. independent total to 48, and a net decrease of one location in China, bringing the China total to 82.
Other international dealers opened five new locations. Our international net sales to independent retailers was 6.5% of our
consolidated net sales compared to 5.4%.
Retail revenue from Ethan Allen operated design centers decreased by $22.8 million, or 3.6%, to $603.7 million from $626.5
million. Comparable store revenue decreased 4.6%. Year‐over‐year, written orders for the Company operated design centers
decreased 0.6% and comparable design centers written orders decreased 2.5%. Consumer spending patterns were disrupted
during the fiscal year, especially around the election cycle, and negatively impacted sales.
Gross profit decreased to $419.7 million from $442.2 million. The $22.5 million decrease in gross profit was attributable to
decreases in both our retail and wholesale segment net sales and a write‐down of inventory of $6.4 million in the third quarter
of fiscal 2017. This was partly offset by a slightly higher mix of retail net sales to consolidated net sales of 79.1% compared
to the 78.9% in the prior fiscal year, and a decrease in cost of goods sold due to the net release of intercompany profit
previously held in ending inventory.
Operating expenses increased $8.7 million or 2.5% to $361.8 million or 47.4% of net sales in fiscal 2017 from $353.1 million
or 44.5% of net sales in fiscal 2016. The increase in fiscal year 2017 expenses in absolute dollars and as a percent of net sales
is primarily due to increased advertising costs, a loss on disposal of real estate in fiscal 2017 compared to a gain on real estate
sales in the prior fiscal year, and an increase in retail occupancy expense associated with a net increase of five design centers,
partly offset by a reduction in incentive compensation.
Operating income for the fiscal year ended June 30, 2017 totaled $58.0 million, or 7.6% of net sales, compared to $89.2
million, or 11.2% of net sales, in the prior fiscal year. Wholesale operating income for fiscal 2017 totaled $53.5 million, or
11.8% of net sales, as compared to $74.4 million, or 15.1% of net sales, in the prior year. Retail operating income was $1.2
million, or 0.2% of sales, for fiscal 2017, compared to $16.5 million, or 2.6% of sales, for fiscal 2016, a decrease of $15.3
million. The decrease in consolidated operating income was primarily attributable to decreased net sales, an inventory write‐
down at both our wholesale and retail segments due to a decision to reduce clearance and discontinued inventory by
donation, increased advertising expenses, the net impact of real estate dispositions, and an increase in retail occupancy
expense, partly offset by the net release of intercompany profit previously held in ending inventory and a reduction in
incentive compensation.
Interest and other related financing costs decreased $0.4 million to $1.2 million from $1.6 million in the prior fiscal year. The
decrease is primarily due to lower interest expense throughout fiscal 2017 due to debt repayments during fiscal 2017
including a $25.0 million paydown on our revolving credit facility to reduce our future debt carrying costs.
Income tax expense was $20.8 million for fiscal 2017 and $31.3 million for fiscal 2016. Our effective tax rate for fiscal 2017
was 36.5% compared to 35.6% in fiscal 2016. 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 2017 was $36.2 million as compared to $56.6 million in fiscal 2016. Net income per diluted share totaled
$1.29 in fiscal 2017 compared to $2.00 per diluted share in the prior fiscal year.
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 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
22
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
Liquidity and Capital Resources
At June 30, 2017, we held unrestricted cash and equivalents of $57.7 million and restricted cash and investments of $7.3
million. At June 30, 2016, we held unrestricted cash and cash equivalents of $52.7 million and restricted cash and investments
of $7.8 million. During fiscal 2017 we used cash to further 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.
For a detailed discussion of our debt obligations and timing of our related cash payments see Note 6 to the Consolidated
Financial Statements included under Item 8 of this Annual Report.
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):
23
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 zati on
Worki ng ca pi ta l i tems
Other opera ti ng a cti vi ti es
Fi s cal Yea rs Ended June 30,
2017
2015
2016
$
56.3
14.5
7.8
$
76.0
(19.3)
1.7
$
56.3
(15.2)
14.0
Tota l provi ded by opera ti ng a cti vi ti es
$
78.6
$
58.4
$
55.1
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 of marketa bl e s ecuri ti es
Other i nves ti ng a cti vi ti es
$
(18.3)
‐
1.9
$
(23.1)
2.2
8.4
$
(21.8)
15.4
9.8
Tota l provi ded (us ed) i n i nves ti ng a cti vi ti es
$
(16.4)
$
(12.5)
$
3.4
Ca s h provi ded by (us ed i n) fi nanci 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 oan fa ci l i ti es
Purcha s es a nd reti rements of compa ny s tock
Pa yment of cas h di vi dends
Other fi na nci ng a cti vi ti es
Tota l us ed i n fi na nci ng acti vi ti es
$
(28.4)
‐
$
(10.2)
(20.0)
1.3
$
(34.8)
‐
$
(19.3)
(16.6)
1.6
$
$
(133.7)
75.0
(17.6)
(13.3)
(1.4)
$
(57.3)
$
(69.1)
$
(91.0)
Cash Provided By (Used in) Operating Activities
In fiscal 2017 cash of $78.6 million was provided by operating activities, an increase of $20.2 million from $58.4 million in the
prior year comparable period. Working capital items were a $14.5 million source of cash in the current year and a $19.3
million use of cash in the prior year, with a net difference of $33.8 million. Most of the working capital difference was due to
an Inventory decrease of $13.5 million in the current year compared to a $10.0 million use of cash in the prior year. Most of
the current year inventory decrease was due to a $6.4 million write‐down of inventory discussed previously in Business
Results. Net income plus depreciation and amortization decreased $19.7 million. 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 2017, cash of $16.4 million was used in investing activities, an increase in cash used of $3.9 million from $12.5 million
which was used during the prior year comparable period. More cash was used during fiscal 2017 primarily due to less proceeds
from the sale of real estate in fiscal 2017 than in the prior fiscal year, and decreased current fiscal year capital expenditures.
We anticipate that cash from operations will be sufficient to fund future capital expenditures in the near and longer term.
Cash Provided By (Used in) Financing Activities
In fiscal 2017, $57.3 million was used in financing activities, a decrease of $11.8 million from $69.1 million in the prior year
comparable period. During fiscal 2017 we paid $25 million on our revolver, $3.4 million in scheduled payments on debt and
capital leases, and utilized $10.2 million to repurchase 357,363 shares at a weighted average cost of $28.67 per share. At June
30, 2017 we have remaining Board authorization to repurchase 1.4 million shares. Cash dividends have been paid every
quarter since July 1996. The following chart shows our dividend history by payment date from July 2013 to the present.
24
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Dividends per share
$0.20
$0.16
$0.12
$0.08
$0.04
$0.00
Jul
2013
Oct
2013
Jan
2014
Apr
2014
Jul
2014
Oct
2014
Jan
2015
Apr
2015
Jul
2015
Oct
2015
Jan
2016
Apr
2016
Jul
2016
Oct
2016
Jan
2017
Apr
2017
Jul
2017
We expect to continue to declare quarterly dividends for the foreseeable future, business conditions permitting.
The following table summarizes, as of June 30, 2017, 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
Tota l
14.9
0.8
197.1
0.1
‐
0.2
Les s
tha n 1
Yea r
1‐3
Yea rs
4‐5
Yea rs
More
tha n 5
Yea rs
$
$
$
3.0
0.4
34.9
0.1
‐
‐
11.8
0.4
57.8
‐
‐
‐
$
0.1
‐
44.6
‐
‐
0.0
‐
‐
59.8
‐
‐
0.2
Tota l contra ctua l obl i ga ti ons
$
213.2
$
38.4
$
70.0
$
44.8
$
60.0
(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, 2017, our open purchase orders with respect to such goods and services totaled approximately $36 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, 2017, we had working capital of $116.7 million compared to
$124.9 million at June 30, 2016, a decrease of $8.2 million and a current ratio of 1.92 to 1 at June 30, 2017 and 2.0 to 1 at
June 30, 2016. 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.
25
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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
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, 2017 and June 30, 2016 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 2017 and 2016, 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
up to seven years and are provided based on terms that are generally accepted in the industry. All 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, 2017 and 2016, the Company’s product warranty liability totaled
$1.3 million and $1.2 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 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. We intend 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 fast order delivery, exceptional quality
26
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
and improving capacity to ship stocked and custom made‐to‐order items more quickly, which in turn will allow us to grow
our business.
Our network of professionally trained interior design professionals differentiates us significantly from our competitors. We
continue to strengthen the level of service, professionalism, and interior design competence, as well as to improve the
efficiency of our retail operations. We believe that over time, we will continue to benefit from (i) continuous repositioning of
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 combined with personal service from our
interior design professionals.
Beginning in the fall of 2014 and through the fall of 2016, we completed a major transformation of our product offerings,
which refreshed over 70% of our entire line of products. During the third quarter of fiscal 2017 we expanded the reach of our
Ethan Allen | Disney product program by selling a curated selection on Disneystore.com, we were awarded a blanket purchase
agreement for the Department of State "Worldwide Residential Furniture Program" and entered into an agreement with Amazon
to sell products through the Amazon marketplace. Now that we have completed this major transformation, 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 on imports, particularly from 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, the majority of which is located in the United States. This structure enables us to 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 shorter lead times 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
relevant product offerings, 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.
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. We are currently conducting a comprehensive review of our revenue streams and contracts as they relate to this
guidance to identify potential differences that would result from applying the new requirements. While we are still assessing
the overall impact this guidance will have on our consolidated financial statements and financial statement disclosures, based
on the work performed to date, we do not believe that the adoption will have a material impact on our consolidated financial
statements.
In July 2015, the FASB issued ASU 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. We plan on adopting effective July 1,
2017.We do not believe that the adoption will have a material impact on our consolidated financial statements.
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. We plan on adopting effective July 1, 2017. At June 30, 2017 and 2016 we had net
27
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
current deferred tax assets of $3.9 million and $3.2 million respectively which would have been classified as noncurrent under
the new standard.
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. We plan on adopting effective July 1, 2019.
In March 2016, the FASB issued ASU 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. We plan on adopting effective July 1, 2017. For
the fiscal years ended June 30, 2017 and 2016, the Company recorded a credit to additional paid in capital of $0.1 million and
$1.0 million respectively, that under the new standard would have been recognized in income. Excess tax benefits were not
material in either fiscal years 2017, 2016 or 2015.
In November 2016, the FASB issued ASU 2016‐18, Statement of Cash Flows (Topic 230): Restricted Cash. It is intended to
reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement. The statement
requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as
presented on the statement of cash flows. The Company currently does not include restricted cash as a component of cash
and equivalents as presented on the statement of cash flows. The new guidance is effective for the Company on July 1, 2018,
with early adoption permitted. The Company is currently evaluating the impact on our consolidated financial statements. We
plan on adopting effective July 1, 2018.
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, 2017, we had $13.8 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. Based on the
average interest rate of the loans under the Facility during the quarter ended June 30, 2017, 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.
28
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, 2017 and 2016, 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, 2017. We also have audited the Company’s internal
control over financial reporting as of June 30, 2017, 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, 2017 and 2016, and the results of their operations and
their cash flows for each of the years in the three‐year period ended June 30, 2017, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued
by COSO.
/s/ KPMG LLP
August 2, 2017
29
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2017 and 2016
(In thousands, except share data)
ASSETS
Current a s s ets :
Ca s h a nd ca s h equi va l ents
Accounts recei va bl e, l es s a l l owa nce for doubtful a ccounts
of $1,667 a t June 30, 2017 a nd $1,639 a t June 30, 2016
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
2017
2016
$
57,701
$
52,659
12,293
149,483
23,621
243,098
270,198
45,128
7,330
2,468
9,467
162,323
23,755
248,204
273,615
45,128
7,820
2,642
Tota l a s s ets
$
568,222
$
577,409
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:
Common s tock, pa r va l ue $0.01; 150,000,000 s ha res
a uthori zed; 48,979,994 s ha res i s s ued a t June 30, 2017 a nd
48,921,544 s ha res i s s ued a t June 30, 2016
Preferred s tock, pa r va l ue $0.01; 1,055,000 s ha res a uthori zed;
none i s s ued
$
2,731
62,960
16,961
20,352
23,441
$
3,001
60,958
15,437
22,067
21,884
126,445
11,608
29,273
167,326
490
‐
123,347
38,837
23,023
185,207
489
‐
Addi ti ona l pa i d‐i n‐ca pi ta l
377,550
374,972
Les s : Trea s ury s tock (a t cos t), 21,532,779 s ha res a t June 30, 2017
a nd 21,175,416 s ha res a t June 30, 2016
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
(635,179)
661,976
(4,131)
400,706
190
400,896
(624,932)
646,315
(4,846)
391,998
204
392,202
Tota l l i a bi l i ti es a nd s ha rehol ders ' equi ty
$
568,222
$
577,409
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
30
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For Years Ended June 30, 2017, 2016, and 2015
(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 :
2017
2016
2015
$
763,385
343,662
419,723
361,773
57,950
268
1,223
56,995
20,801
$
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
$
36,194
$
56,637
$
37,142
Net i ncome per ba s i c s ha re
$
1.31
$
2.02
$
1.29
Ba s i c wei ghted a vera ge common s ha res
27,679
28,072
28,874
Net i ncome per di luted s ha re
$
1.29
$
2.00
$
1.27
Di l uted wei ghted a vera ge common s ha res
27,958
28,324
29,182
Di vi dends decl a red per common s ha re
$
0.74
$
0.62
$
0.50
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
$
36,194
$
56,637
$
37,142
715
(14)
701
(2,208)
27
(2,181)
(3,308)
78
(3,230)
Comprehens i ve i ncome
$
36,895
$
54,456
$
33,912
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
31
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Years Ended June 30, 2017, 2016, and 2015
(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 mortiza ti on
Compens a tion expens e rel a ted to s ha re‐ba s ed pa yment a wa rds
Provi s i on 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 bil i ti es
Net ca s h provided 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
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 provided 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 cil 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 ncing 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
2017
2016
2015
$
36,194
$
56,637
$
37,142
20,115
1,259
3,507
‐
1,033
(6)
(2,826)
13,507
1,010
1,883
1,524
(547)
1,980
78,633
1,273
490
(17,645)
(676)
‐
175
(16,383)
‐
(28,401)
(10,246)
(20,031)
1,335
(57,343)
135
5,042
52,659
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
Ca s h & ca s h equi va l ents ‐ end of yea r
$
57,701
$
52,659
$
76,182
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 pita l l ea s e obl i ga ti ons i ncurred
See a ccompa nyi ng notes to cons ol i da ted fi na nci a l s ta tements .
$
$
$
15,074
936
613
$
29,003
$
1,352
$
‐
$
$
$
18,250
7,181
1,700
32
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For Years Ended June 30, 2017, 2016, and 2015
(In thousands, except share data)
Common
Stock
Addi ti ona l
Pa id‐in
Ca pi ta l
Trea s ury
Stock
Accumul a ted
Other
Comprehens i ve
Income
Reta ined
Ea rnings
Non‐
Control l i ng
Interes ts
Tota l
Ba l a nce a t June 30, 2014
486
365,733
(584,041)
642
584,395
252
367,467
‐
‐
‐
‐
‐
‐
‐
‐
‐
(14,458)
‐
(3,280)
(2,638)
‐
‐
‐
‐
‐
37,142
607,079
‐
‐
‐
‐
‐
(17,401)
‐
‐
‐
‐
‐
(25)
50
277
‐
‐
‐
‐
‐
‐
56,637
646,315
(100)
27
204
‐
(2,208)
(4,846)
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
‐
4,120
1,236
(172)
(21,545)
(14,458)
(25)
33,912
370,535
734
2,356
968
(19,346)
(17,401)
(100)
54,456
392,202
1,200
1,259
120
(10,247)
(20,533)
‐
$
490
$
377,550
$
(635,179)
$
(4,131)
$
661,976
$
190
$
400,896
‐
(20,533)
‐
715
‐
36,194
(14)
36,895
‐
‐
‐
(21,545)
‐
‐
‐
(605,586)
‐
‐
‐
(19,346)
‐
‐
‐
‐
‐
‐
(10,247)
‐
‐
‐
Stock i s s ued on s ha re‐ba s ed a wa rds
3
4,117
Compens a ti on expens e a s s oci a ted with
s ha re‐ba s ed a wa rds
Ta x benefi t a s s oci a ted wi th exerci s e of
s ha re ba s ed a wa rds
Purcha s e/reti rement of compa ny s tock
Di vi dends decl a red on common s tock
Ca pita l di s tri bution
Comprehens i ve i ncome (los s )
Ba l a nce a t June 30, 2015
Stock i s s ued on s ha re‐ba s ed a wa rds
Compens a ti on expens e a s s oci a ted with
s ha re‐ba s ed a wa rds
Ta x benefi t a s s oci a ted wi th exerci s e of
s ha re ba s ed a wa rds
Purcha s e/reti rement of compa ny s tock
‐
1,236
‐
‐
‐
‐
‐
489
‐
(172)
‐
‐
‐
‐
370,914
734
‐
2,356
‐
‐
968
‐
Di vi dends decl a red on common s tock
‐
‐
Ca pita l di s tri bution
Comprehens i ve i ncome (los s )
Ba l a nce a t June 30, 2016
‐
‐
‐
‐
489
374,972
(624,932)
Stock i s s ued on s ha re‐ba s ed a wa rds
1
1,199
Compens a ti on expens e a s s oci a ted with
s ha re‐ba s ed a wa rds
Ta x benefi t a s s oci a ted wi th exerci s e of
s ha re ba s ed a wa rds
Purcha s e/reti rement of compa ny s tock
‐
1,259
‐
‐
120
‐
Di vi dends decl a red on common s tock
‐
‐
Ca pita l di s tri bution
Comprehens i ve i ncome (los s )
Ba l a nce a t June 30, 2017
‐
‐
‐
‐
See a ccompa nyi ng notes to cons oli da ted fi na nci a l s ta tements .
33
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
June 30, 2017, 2016 and 2015
(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.
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, 2017 there were a total of 303 design centers in our retail
network, of which 148 are Company operated and 155 are independently operated. Nearly all 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 own and operate nine manufacturing facilities including six
manufacturing plants and one sawmill in the United States and one manufacturing plant in Mexico and one in 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 and impairment analyses 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 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.
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).
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.
34
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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. Several 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.
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 is evaluated for impairment whenever events or changes in circumstances indicate that
we may not be able to recover the carrying amount of an asset or asset group. Our assessment of recoverability determines
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.
35
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 our long‐term debt at both June 30, 2017 and
2016 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 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 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 $71.3 million in fiscal year 2017, $71.7 million for fiscal 2016 and $67.3
million in fiscal 2015.
Advertising Costs
Advertising costs are expensed when first aired or distributed. Our total advertising costs were $39.7 million in fiscal year
2017, $34.1 million in fiscal year 2016 and $31.8 million in fiscal year 2015. These amounts include advertising media
expenses, outside and inside agency expenses, certain website related fees and photo and video production. Fiscal 2016 and
2015 amounts include reclassifications to conform to the current year presentation. Prepaid advertising costs at June 30,
2017 totaled $1.5 million compared to $2.0 million at June 30, 2016.
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.
36
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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.
Recently Adopted Accounting Pronouncements
There were no accounting pronouncements adopted in the fiscal years ended June 30, 2017 or 2016 that had a material effect
on our consolidated financial statements or financial statement disclosures.
(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, 2017, 2016 and 2015 respectively.
(3)
Inventories
Inventories at June 30 are summarized as follows (in thousands):
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
2017
2016
$
117,388
10,638
26,269
(4,812)
$
129,627
9,497
27,554
(4,355)
$
149,483
$
162,323
(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
2017
2016
$
79,200
400,246
125,773
605,219
$
80,002
392,196
126,066
598,264
Les s : a ccumul a ted depreci a ti on a nd a morti za ti o (335,021)
(324,649)
Property, pl a nt a nd equi pment, net
$
270,198
$
273,615
37
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(5)
Goodwill and Other Intangible Assets
At both June 30, 2017 and 2016, 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 2017, 2016, and 2015, the Company performed qualitative assessments of the fair value
of the wholesale reporting unit and concluded it is more likely than not 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 2017, 2016 and 2015. 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):
Revol vi ng Credi t Fa ci l i ty due 10/21/2019
Term Loa n due 10/21/2019
Ca pi ta l l ea s es
Tota l debt obl i ga ti ons
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
June 30,
2017
June 30,
2016
$
‐
13,833
1,085
14,918
(579)
14,339
2,731
$
25,000
16,167
1,560
42,727
(889)
41,838
3,001
$
11,608
$
38,837
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. 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, 2017 the annual
interest rate in effect on the revolving loan was 2.5625%.
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, 2017 the annual interest rate in effect
on the term loan was 3.0%.
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. In fiscal 2017 we repaid $25.0 million of the revolving credit facility with excess operating cash.
The Company does not expect to repay in advance any additional portion of the Facility within the next year.
38
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 Facility includes a covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.1 to 1.0
at all times unless the outstanding term loans are less than $17.5 million and the fixed charge coverage ratio equals or exceeds
1.25 to 1.0, in which case 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. The Company has met the exemption conditions and
is currently exempt from the fixed charge coverage ratio covenant.
The Company intends to use the Facility for working capital and general corporate purposes, including dividend payments
and share repurchases. At June 30, 2017 and June 30, 2016, there was $0.1 million and $0.2 million respectively, of standby
letters of credit outstanding under the Facility. Total availability under the Facility was $114.9 million at June 30, 2017 and
$89.8 million at June 30, 2016.
At both June 30, 2017 and June 30, 2016, we were in compliance with all covenants of under the facility.
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 verage i nteres t ra te
Fi s ca l Year Ended June 30,
2017
2.4%
2016
2.0%
2015
4.8%
Aggregate scheduled maturities of our debt obligations for each of the five fiscal years subsequent to June 30, 2017, and
thereafter are as follows (in thousands):
Fi s ca l Yea r Ended June 30
2018
2019
2020
2021
2022
Subs equent to 2022
2,999
2,518
9,294
66
41
‐
Tota l s chedul ed debt pa yments
$
14,918
(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, 2017, and thereafter are shown in the table below. Also shown are minimum future rentals from subleases, which will
partially offset lease payments in the aggregate (in thousands):
Fiscal Year Ended June 30,
2018
2019
2020
2021
2022
Subsequent to 2022
Total
Minimum Future
Lease Payments
Minimum Future
Sublease Rentals
$
34,901
$
2,012
31,157
26,610
24,118
20,526
59,804
$
1,469
965
776
657
152
$
197,116
$
6,031
39
Total rent expense for each of the past three fiscal years ended June 30 was as follows (in thousands):
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
2017
2016
2015
Ba s i c renta l s under opera ti ng l ea s es
$
33,033
$
31,692
$
31,220
Conti ngent renta l s under opera ti ng l ea s es
Ba s i c a nd contingent renta ls
Les s : s ubl ea s e rent
Tota l rent expens e
142
33,175
(1,824)
180
31,872
(1,964)
160
31,380
(3,062)
$
31,351
$
29,908
$
28,318
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
2017
13,876
5,238
$
$
2016
13,003
4,538
$
$
Our authorized capital stock consists of 150,000,000 shares of Common Stock, par value $.01 per share, and 1,055,000 shares
of Preferred Stock, par value $.01 per share. The Board of Directors may provide for the issuance of all or any shares of
Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or
no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights
and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions
adopted by the Board of Directors providing for the issuance of such class or series and as may be permitted by the General
Corporation Law of the State of Delaware. As of June 30, 2017 and 2016, there were no shares of Preferred 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. After 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, 2017 we had a remaining Board authorization to repurchase 1.4 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
357,363
697,799
645,831
Cos t to repurcha s e common s ha res
$
10,246,302
$
19,346,104
$
16,469,725
Avera ge pri ce per s ha re
$
28.67
$
27.72
$
25.50
2017
2016
2015
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 our common stock repurchases are recorded as treasury stock and result in
a reduction of shareholders’ equity.
40
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(9)
Earnings per Share
The following table sets forth the calculation of weighted average shares for the fiscal years ended June 30 (in thousands):
Weighted average shares of common stock
outstanding for basic calculation
Effect of dilutive stock options and other
share‐based awards
Weighted average shares of common stock
outstanding adjusted for dilution calculation
2017
2016
2015
27,679
28,072
28,874
279
252
308
27,958
28,324
29,182
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 2017, 2016 and 2015, stock options and share based
awards of 379,350, 460,155 and 591,058, respectively, have been excluded.
(10)
Share‐Based Compensation
For the twelve months ended June 30, 2017, 2016, and 2015, share‐based compensation expense totaled $1.3 million, $2.4
million, and $1.2 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, 2017, 2016, and 2015,
we recognized related tax benefits associated with our share‐based compensation arrangements totaling $0.5 million, $0.8
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, 2017, we had 1,263,530 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 under 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 vidend yi el d
Expected a vera ge l i fe (yea rs )
2017
36.8%
1.03%
1.96%
5.0
2016
48.1%
1.93%
1.95%
6.3
2015
52.9%
2.03%
2.09%
6.7
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
41
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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, 2017, 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 remaining 130,000 Performance Options did not achieve the respective performance conditions so the
amortization to date was reversed at June 30 2017, and the options will be cancelled during fiscal 2018. 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, 2017 is presented below.
Options
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
Intrins i c Va l ue
Outs ta ndi ng ‐ June 30, 2016
907,073
$
24.08
Gra nted
Exerci s ed
Ca ncel ed (forfei ted/expi red)
Outs ta ndi ng ‐ June 30, 2017
20,153
(58,450)
(32,756)
836,020
34.73
20.51
28.77
24.41
Exerci s a bl e ‐ June 30, 2017
550,736
$
23.33
4.2
2.4
$
6,900,417
$
5,201,916
The weighted average grant‐date fair value of options granted during fiscal 2017, 2016 and 2015 was $8.30, $11.53 and
$11.30 respectively. The total intrinsic value of options exercised during 2017, 2016 and 2015 was $0.8 million, $0.3 million,
and $4.5 million, respectively. As of June 30, 2017, there was $0.7 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 1.8
years. A summary of the nonvested shares as of June 30, 2017 and changes during the year then ended is presented below.
Opti ons
Nonves ted June 30, 2016
Gra nted
Ves ted
Ca ncel ed (forfei ted/expi red)
Nonves ted a t June 30, 2017
Stock Unit Awards
Sha res
353,702
20,153
(71,904)
(16,667)
285,284
Wei ghted Avera ge
Gra nt Da te Fa i r Va l ue
$
11.28
8.30
10.67
11.25
$
11.18
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 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 years ended June 30 are noted in the table following. No Performance based restricted stock unit awards
were granted under the Plan prior to December 1, 2015.
42
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Vol ati l i ty
Ri s k‐free rate of return
Di vi dend yi el d
Expected a vera ge l i fe (yea rs )
2017
2016
30.8%
0.92%
1.97%
2.04
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. Equity‐based compensation expenses related to performance‐based
shares recognized in our consolidated statements of comprehensive income are presented in the following table for the fiscal
years ended June 30 (in thousands).
Gra nted wi thi n fi s ca l yea rs endi ng June 30,
2017
2016
2016
2017
Tota l expens e
$
794
$
733
12
‐
$
806
$
733
A summary of stock unit activity occurring during the fiscal year ended June 30, 2017 is presented below.
Non‐ves ted uni ts a t June 30, 2016
Gra nted
Ves ted
Ca ncel ed (forfei ted/expi red)
Wei ghted
Avera ge
Gra nt Da te
Fa i r Va l ue
Uni ts
218,050
$
24.53
90,280
29.28
‐
‐
‐
‐
Non‐ves ted uni ts a t June 30, 2017
308,330
25.92
As of June 30, 2017, there was $0.3 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 2.3
years.
Restricted Stock Awards
No restricted stock awards were granted or vested during fiscal 2017 and there was no unrecognized compensation cost
related to restricted shares granted under the Plan.
43
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(11)
Income Taxes
Income tax expense 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
2017
2016
2015
$
15,265
1,585
445
$
27,660
2,898
88
$
15,064
489
55
17,295
30,646
15,608
3,413
85
8
3,506
(237)
207
703
673
2,979
759
195
3,933
Income Ta x Expens e (Benefi t)
$
20,801
$
31,319
$
19,541
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):
2017
2016
2015
Expected Income Ta x Expens e
$
19,947
35.0%
$
30,785
35.0%
$
19,839
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
Secti on 199 Qua l i fi ed Producti on Acti vi ti es deducti on
Unrecogni zed ta x expens e (benefi t)
Other, net
1,403
329
(999)
(48)
169
2.5%
0.6%
‐1.8%
‐0.1%
0.3%
2,514
339
(1,513)
(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%
Actua l i ncome ta x expens e (benefi t)
$
20,801
36.5%
$
31,319
35.6%
$
19,541
34.5%
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
Stock ba s ed compens a ti on
Deferred rent credi ts
Net opera ting l os s ca rryforwa rds
Inventori es
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
2017
2016
4,395
2,878
7,290
3,687
1,254
953
2,396
4,343
2,665
6,705
3,375
155
1,729
2,504
22,853
(2,485)
21,476
(2,155)
$
20,368
$
19,321
44
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Deferred ta x l i a bi l i ti es :
Property, pl a nt a nd equi pment
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
2017
2016
5,360
14,166
3,420
‐
22,946
654
14,260
3,478
‐
18,392
Tota l net deferred ta x a s s et (l i a bi l i ty)
$
(2,578)
$
929
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 li ti es
Non‐current l i a bi l i ties
2017
2016
$
3,916
1,167
‐
7,661
$
3,174
835
‐
3,080
Tota l net deferred ta x a s s et (l ia bi l i ty)
$
(2,578)
$
929
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
less than 50% likely that assets will be realized. At June 30 of 2017 and 2016, such an allowance was in place against the
Belgian foreign tax assets, and at June 30, 2017 this valuation allowance was approximately $2.5 million.
The Company’s deferred income tax assets at June 30, 2017 with respect to the net operating losses expire as follows (in
thousands):
Deferred
Income
Tax Assets
Net Operating
Loss
Carryforwards
United States (State), expiring between
2018 and 2032
Foreign, Expiring in 2034
$
1,110
$
23,760
2,577
7,622
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 $2.1 million
of unrecognized tax benefits and related interest and penalties as of June 30, 2017 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, 2017 and 2016 is as follows (in thousands):
2017
2016
Begi nning ba l a nce
Addi ti ons for ta x pos i ti ons ta ken
Reducti ons for ta x pos i tions ta ken i n pri or yea rs
Settl ements
$
2,170
646
(694)
(16)
$
3,117
776
(1,530)
(193)
Endi ng ba l a nce
$
2,106
$
2,170
It is reasonably possible that various issues relating to approximately $0.2 million of the total gross unrecognized tax benefits
as of June 30, 2017 will be resolved within the next twelve months as exams are completed or statutes expire. If recognized,
45
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
approximately $0.1 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, 2017, the Company and certain subsidiaries are currently under audit from 2014 through 2016 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 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 $3.5 million in 2017, $3.4 million in 2016, and $3.3 million in 2015.
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 $1.0 million, $3.6 million, and $3.7 million in 2017, 2016 and 2015, respectively.
(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. 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.
46
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
(14)
Accumulated Other Comprehensive Income
The following table sets forth the activity in accumulated other comprehensive income for the fiscal years ended June 30 (in
thousands):
Yea rs ended June 30,
2016
2017
Begi nni ng ba l a nce
$
(4,846)
$
(2,638)
Cha nges before recl a s s i fi ca ti ons
Amounts recl a s s i fied from a ccumul a ted
other comprehens i ve i ncome
Current period other comprehens i ve i ncome
715
‐
715
(2,208)
‐
(2,208)
Endi ng ba l a nce
$
(4,131)
$
(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.
(15)
Segment Information
Our wholesale and retail operating segments represent strategic business areas of our vertically integrated enterprise that
operate separately and provide their own distinctive services. This vertical structure enables us to offer our complete line of
home furnishings and accents more effectively while controlling quality and cost. 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.
As of June 30, 2017, the Company operated 148 design centers (our retail segment) and our independent retailers operated 155
design centers. 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
2017. Our wholesale segment net sales to independent retailers accounted for 21%, including approximately 11.9% of our
consolidated net sales in fiscal 2017 to the ten largest independent retailers, who operate 101 design centers. Information for
each of the last three fiscal years ended June 30 is provided below (in thousands):
47
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Net s a l es :
Whol es a l e s egment
Reta i l s egment
El i mi na ti on of i nter‐compa ny s a l es
Cons ol i da ted Tota l
2017
2016
2015
$
453,326
603,677
(293,618)
$
491,467
626,511
(323,776)
$
469,384
579,713
(294,497)
$
763,385
$
794,202
$
754,600
Opera ti ng i ncome (l os s ):
Whol es a l e s egment
Reta i l s egment
Adjus tment of i nter‐compa ny profi t (1)
Cons ol i da ted Tota l
$
53,505
1,198
3,247
$
74,412
16,450
(1,683)
$
66,988
1,726
(2,780)
$
57,950
$
89,179
$
65,934
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)
$
7,550
12,565
$
7,587
11,766
$
8,044
11,098
$
20,115
$
19,353
$
19,142
$
8,589
9,056
676
$
12,446
10,521
165
$
9,427
10,360
1,991
$
18,321
$
23,132
$
21,778
June 30,
2017
June 30,
2016
June 30,
2015
$
279,364
319,341
(30,483)
$
271,116
339,942
(33,649)
$
295,949
341,886
(31,858)
Cons ol i da ted Tota l
$
568,222
$
577,409
$
605,977
(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.
Fiscal Year Ended June 30,
2016
2017
2015
Independent design centers
Company operated design centers
Total international design centers
107
6
113
103
6
109
97
7
104
Percentage of consolidated net sales
10.0%
9.2%
11.6%
48
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, 2017, 2016, and 2015 (in
thousands, except per share data):
Fi s ca l 2017:
Net Sa l es
Gros s profi t
Net i ncome
Ea rni ngs per bas 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 2016:
Net Sa l es
Gros s profi t
Net i ncome
Ea rni ngs per bas 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 bas 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
$
193,287
$
194,672
$
180,501
$
194,925
108,467
11,529
0.42
0.41
0.17
108,124
10,700
0.39
0.38
0.19
94,735
2,282
0.08
0.08
0.19
108,397
11,683
0.42
0.42
0.19
$
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
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. 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 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.
49
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, 2017 and June
30, 2016
(in thousands):
June 30, 2017
June 30, 2016
Level 1
Level 2
Ba l ance
Level 1
Level 2
Ba l a nce
Cas h equi va l ents
$
65,031
$
‐
$
65,031
$
60,479
$
‐
$
60,479
Ava i l a bl e‐for‐s a l e s ecuri ti es
‐
‐
‐
‐
‐
‐
Tota l
$
65,031
$
‐
$
65,031
$
60,479
$
‐
$
60,479
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 2017 or 2016. At June 30, 2017 and 2016, $7.3 million and $7.8 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, 2017 or 2016 as all municipal bonds matured and the proceeds
were transferred to our operating cash accounts. There were no material gross unrealized gains or losses on available‐for‐
sale securities at June 30, 2017 or June 30, 2016.
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, 2017 and 2016 we held $7.3 million and $7.8 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”.
(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, 2017
June 30, 2016
June 30, 2015
$
$
$
$
1,639
1,386
1,442
28
253
(56)
‐
$
‐
$
‐
$
$
1,667
1,639
1,386
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
50
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 Chairman of the
Board and Chief Executive Officer ("CEO") and Executive Vice President Administration 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, 2017,
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
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, 2017 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, 2017, as stated in their report included under Item 8 of this Annual Report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a‐15(f) and
15d‐15(f) under the Exchange Act) during the fiscal quarter ended June 30, 2017 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
51
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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 15, 2017 (the
"Proxy Statement") to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our 2017 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 three "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:
James B. Carlson
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 2017
Proxy Statement.
Item 11. Executive Compensation
The information required by this Item will be included in and is incorporated herein by reference from our 2017 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 2017 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 2017 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 2017 Proxy Statement.
52
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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, 2017 and 2016, and for the years ended June 30, 2017, 2016 and 2015 consist of the following:
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders' Equity
Notes to the 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)
3 (b)
3 (c)
3 (d)
3 (e)
3 (f)
3 (g)
3 (g)‐1
3 (h)
3 (i)
Exhibit
Amended and Restated Certificate of Incorporation of the Company dated as of November 16, 2016
(incorporated by reference to Exhibit 3.(A) to the Current Report on Form 8‐K of the Company filed with
the SEC on November 16, 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
Current Report on Form 8‐K of the Company filed with the SEC on November 16, 2016)
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)
3 (i)‐1
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
53
3 (j)
3 (k)
3 (l)
3 (l)‐1
3 (m)
3 (n)
3 (o)
3 (p)
10 (a)
10 (b)
10 (c)
10 (d)
10 (d)‐1
10 (d)‐2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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)
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)
10 (d)‐3
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.
54
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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)
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 Report 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 Report 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
Report 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 Documentation
Agent dated as of October 21, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report 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).
10 (d)‐4
10 (d)‐5
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)
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) †
55
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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) †
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
10 (g)‐1
10 (g)‐2
10 (g)‐3
10 (g)‐4
10 (g)‐5
21
23
31.1
31.2
*
32.1
*
32.2
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.
† Management contract or compensatory plan, contract or arrangement.
Item 16. Form 10‐K Summary
None.
56
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 2, 2017
DATE: August 2, 2017
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/ 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 2, 2017
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
57
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S
N
ATIO
R
E
P
BLE O
A
Sustainable operations,
safe processes, and social
conscience have been the
hallmarks of Ethan Allen’s past.
We believe these fundamental
values, timeless even in an uncertain
and rapidly shifting marketplace,
will also define our future.
In 1999, Ethan Allen created its
Environmental Health and Safety
(EH&S) initiative. It is now what it was
then: a passionate drive, from corporate
offices to Design Centers to manufacturing
facilities to supply chains—end to end and top
to bottom—to build both environmental commitment
and outstanding business performance through
sustainable operations.
TAIN
SUS
At first, we were guided by voluntary efforts. In 2010, we stepped up
our commitment in a big way. We partnered with the American Home
Furnishings Alliance to start our journey toward becoming a Sustainable
by Design company.
The Sustainable by Design process provides a sound procedural framework
for our environmental efforts, but make no mistake—sustainability is in our DNA.
Ethan Allen has always made the extra effort to minimize our effect on the
environment, and we did it when no one asked us to.
The first step toward our systemic environmental responsibility commitment was to register
as an Enhancing Furniture’s Environmental Culture (EFEC) company. It meant implementing a
comprehensive environmental management system that helped us learn how our processes, raw
materials, and finished products affect the environment.
EFEC REGISTRATION
EFEC brought a new level of awareness to our EH&S efforts. It transformed the way we worked and
the way we crafted our products. Every Ethan Allen manufacturing, distribution center, and service
center, and all of our Design Centers, are now EFEC registered.
OPERATIONS
Across our company, we’ve revamped our processes to
slash our carbon footprint. In both our Orleans, Vermont,
manufacturing plant and our Beecher Falls, Vermont,
plant and sawmill, we now use sawdust scraps in lieu
of fossil fuels to power our boilers. In Beecher Falls, we
also use steam from our boilers to heat our wood-drying
kilns. When appropriate, the steam is used for true
cogeneration of electricity.
In Beecher Falls and Orleans, Vermont; in Passaic,
New Jersey; and in Old Fort and Maiden, North Carolina,
our plants recycle or repurpose every resource they can,
which has reduced our domestic manufacturing landfill
waste. We’ve also established successful recycling programs
in our global headquarters and in all our Design Centers.
In fact, many of our distribution and service centers have
achieved a negative carbon footprint profile due to
establishing strong recycling and repurposing programs.
Ethan Allen’s recycling efforts in manufacturing have leveled
off to a nine-percent increase since 2010, suggesting both
that less material is being recycled and that we’ve achieved
tighter control over materials purchased. Still, this enables
over 140,000 pounds of what would have gone into landfills
to find new uses.
RAW MATERIALS
Ethan Allen’s future—in fact, the world’s future—depends
on healthy, well-managed forests. In many cases, we satisfy
our manufacturing requirements with hardwoods that
regenerate naturally through seeding and sprouting. When
we use nonnative species like mahogany, we work to source
it from properly managed forests. We also address Lacey
Act compliance, maintaining transparency concerning the
origins of plant species and plant products we use.
FINISHED PRODUCTS
Our environmental commitment doesn’t end when our
products roll off the factory floor. We work to ensure
our products are safe in our customers’ homes through
responsible use of chemicals and manufacturing substances.
• Safer packaging. We’ve eliminated the use of heavy
metals and hydrochlorofluorocarbons (HCFC) in all
packaging components.
• Sensible fabrics and foams. Our mattresses and
custom upholstery use only CertiPUR-US® certified
foams, which are low-VOC polyurethanes made without
harmful chemicals and substances—no formaldehyde,
mercury, lead, heavy metals, PBDEs, ozone depleters,
or prohibited phthalates.
• Superior finishes. By using low-HAP, low-VOC coatings,
including some water-based finishes, we’re committed
to improving air quality in our facilities.
SPOTLIGHT ON
NEWTOWN, CT
A service center has transformed
itself into a recycling and sustainability
powerhouse.
When you visit Ethan Allen’s Newtown service center,
you’ll notice a warehouse full of people and finely crafted
furniture. You’ll also see an enormous cardboard compactor
and a machine that transforms polystyrene into long
recyclable bricks.
Newtown is the company’s largest service center, and it’s
distinguished by its exemplary commitment to recycling.
Newtown’s cuts in CO2e alone offset the carbon footprint
of every Design Center it supplies. According to manager
J.J. Monteiro, Newtown’s Styrofoam recycling efforts have
earned over $100,000 in federal government rebates. And
their waste management company doesn’t even charge them
for hauling away plastic—because the quantity of plastic they
get from Newtown earns them a net profit.
Monteiro credits EH&S director Paul Kaminski for keeping
sustainability front and center. He also credits assistant
warehouse manager Dan Williams, who is the point person
for Newtown’s EFEC program.
Starting on the day they join Ethan Allen and continuing
through every day on the job, Newtown associates learn the
why behind the recycling commitment—and they learn to
see it as a point of pride. The Newtown team isn’t done yet.
They’re upgrading lighting systems next.
Carbon
Footprint
-25%
REDUCED
9 MILLION
pounds of CO2e
Electricity
Usage
-6%
REDUCED
2.1 MILLION
kWh
Recycling
+9%
INCREASED
140,177
pounds
Water
Usage
-24%
REDUCED
8.7 MILLION
gallons
Greenhouse
Gases
-21%
REDUCED
8.5 MILLION
pounds of CO2e
Landfill Waste
-5%
REDUCED
149,960
pounds
OUR SUSTAINABILITY SUCCESS STORY
DOMESTIC MANUFACTURING CHANGES, 2010 to 2016
SU STAINABL E BY DESIGN
The second step of the AHFA Environmental Management
System process extends our EFEC work throughout our
supply chain. It requires us to quantify our supply chain’s
environmental effects, our overall corporate environmental
footprint, our global climate impact, and our social
responsibility successes.
ENVIRONMENTALLY PREFERABLE PURCHASING
Our Environmentally Preferable Purchasing initiative
means that, in all aspects of our business, we consider
sustainability factors before purchasing materials.
Some of the environmental factors we weigh during
the procurement process include:
• Recycled content
• Recyclability
• Durability
• Reusability
• Product disassembly
potential
• Reconditioned or
remanufactured
• Take-back
• Bio-based
• Energy efficiency
• Water efficiency
We evaluate our purchasing options based on the
Environmental Protection Agency’s (EPA) equation:
Environment + Price + Performance =
Environmentally Preferable Purchasing
We also incorporate risk assessment into every purchasing
decision. This means thinking about the country in which
items are produced and the standards governing how
workers are treated. It also means evaluating how well
producers control processes and whether they follow
industry best practices. Being “Sustainable by Design”
means not only protecting the environment but also
preserving our reputation for quality.
CARBON FOOTPRINT CALCULATOR
Our carbon footprint calculator assesses the environmental
impact of each Ethan Allen location—and our combined
global environmental impact. We established baseline
readings at different locations, implemented changes,
and set target metrics for six key areas:
1. Overall carbon footprint. We took baseline
measurements, measured in tons of CO2e
released per year, and implemented changes in
our manufacturing facilities starting in 2010. In 2011,
we added distribution centers to our initiative,
and in 2016 we have expanded this method into
our Retail Design Centers.
2. Electricity. In our manufacturing operations, we
burn sawdust and scrap wood to generate steam and,
in some locations, we use that steam to cogenerate
electricity. We’ve also implemented more energy-
efficient lighting throughout the company. These
measures help us lower the total kilowatt-hours we
purchase from the grid.
3. Water. We’re using fewer gallons of water than we
once did thanks to initiatives like installing low-flow
toilets, adding restrictors to certain water systems,
and improving delivery efficiency.
4. Landfill waste. From our corporate offices to every
manufacturing, distribution, and retail location, we
make it easy for employees to recycle as many items
as possible, reducing our contribution to landfills.
5. Greenhouse gas. In addition to cutting carbon,
we’re working hard to release fewer pounds of
other greenhouse gases that can increase the
greenhouse effect.
6. Biomass. Our manufacturing business uses
wood products as raw material in much that we
manufacture. When we combust wood leftovers
from our manufacturing operations and burn
them for steam generation, we not only cut
energy costs but also get true cogeneration
when the same steam for heating is used to
dry lumber or make energy.
PR O C ESSES
SA FE
SA FE
PR O C ESSES
We make approximately 75 percent of our products in our
North American workshops and maintain partnerships with
artisans around the world. To give our clients the quality
they always expect from Ethan Allen—and as a statement
of our values—we're working to standardize processes in
product development, manufacturing, and distribution.
We also meet or exceed a range of product safety
regulatory standards. From the way we source wood to
the way we craft custom upholstery, our efforts coalesce
around three core concepts: delivering quality without
compromise, forming transparent partnerships, and
ensuring accountability throughout the supply chain.
Q U ALI TY WI THO UT COMPRO M I S E
In partnership with EH&S, the Ethan Allen Product
Compliance team is doing an extensive overhaul of both
our product standards manual and our product testing
and labeling protocols. This means creating uniform
preproduction processes, improving inspections,
enhancing product testing, performing additional third-
party evaluations, and ensuring responsible labeling.
• Preproduction: As we build partnerships with new
facilities all over the world, we're asking for more
consistent design drawings and specifications for
every Ethan Allen product. We want each factory
to understand our design expectations to an
extraordinary level of detail. This precision means
that every worker manufacturing an Ethan Allen
chair, at any Ethan Allen or partner manufacturing
facility, knows where every last screw and nail
should go and which types of screws and nails
we expect them to use.
• Inspection: During both in-line and postproduction
inspections, as well as when component parts arrive
at each factory, we're rolling out more uniform
procedures to ensure consistent production quality.
We're also working with manufacturers to help them
build internal quality control teams, to train their
workers to a high level, to investigate potential issues
before they become problems, and to know when to
escalate quality control issues to facility managers and
Ethan Allen partners.
• Product testing: We're rolling out informative, easy-
to-use manuals for every product we create, including
detailed lists of testing protocols and acceptable
results. From children's products to lighting, we
ensure that any product bearing our name meets
or exceeds safety standards.
• Responsible labeling: From product labeling to
labels on shipping cartons, we're improving accuracy
and communication throughout the supply chain
and with regulators. We're keeping our Sustainable
by Design goal in mind: to let our clients know the
safety, health, and environmental impact of every
Ethan Allen product.
SPOTLIGHT ON
MAIDEN, NC
Improved processes and a team commitment
lead to big safety improvements.
The North Carolina Department of Labor recently
recognized Ethan Allen's Maiden manufacturing plant
for achieving one million man hours without a single lost
time incident. The local safety director, Matt Jenkins,
credits improved safety training, better case management,
and solid managerial support for the change.
Maiden organized a ten-member safety team—none of whom
are managers—to perform safety audits and conduct training
on all manufacturing procedures. Lavonda Shires, RN,
Maiden's occupational health and case management
nurse, says that incidents are declining because front-line
managers take more responsibility for their areas. Her case
management philosophy is simple: Report on every incident,
even minor ones. “The more minor incidents you report,”
she says, “the fewer major incidents you have.”
Jenkins credits plant manager Randy Rose for supporting
corporate safety initiatives; Rose is a big EH&S supporter,
which drives program success from the top down to the shop
floor, where injuries can happen. “I believe this support from
the top down is as critical as good programs and training,”
Jenkins says. “The line people will always support EH&S if
they believe management does.”
T RANSP ARE NT P ARTN ERSHI P S
Ethan Allen's manufacturing facilities are built close to sources
of raw materials, and they're based in communities with talent
pools of skilled craftspeople. In addition to our U.S. facilities,
we have an upholstery manufacturing plant in Mexico and a
ACCOUNTABILITY THROUGHOUT
THE SUPPLY CHAIN
case goods manufacturing plant in Honduras.
It's not enough to state our expectations; we also have to
We also selectively outsource outside the United States,
mostly in Asia, and mostly with suppliers that have worked
with Ethan Allen for many years. Sustainability requires a
consistent supply chain, and we've worked hard to
minimize disruptions by developing strong relationships
with our stakeholders.
ensure they are met. Most of the risk assessment activities
for our outsourced products are informal based on our long
history with suppliers. They understand our expectations
and maintain close communications with our purchasers and
merchandisers. Ethan Allen works hard to ensure suppliers
continuously meet standards related to the
• social mores and standards of the country of operation;
Setting clear product creation, manufacturing, testing, and
• control of processes according to industry best
shipping standards is one way we communicate expectations
practices;
to every vendor. We also set high standards regarding the
• disclosure of subcontractors; and
way we expect our partners to operate. For example, when
our suppliers partner with their own contractors to deliver
work for Ethan Allen, we endeavor to ensure they receive
training regarding our safety program requirements and
follow our contractor safety guidelines.
• workforce size and labor type.
As representatives of Ethan Allen, our merchandisers
and purchasers are expected to report risks both to
supervisors and to product supply chain team members.
After supervisors confirm that a high-risk scenario exists,
Additionally, we're building partnerships with local third-
they communicate that risk to our VP of operations. Then,
party testing facilities to make it easier for our partners to
a specific action plan, with remediation steps and a realistic
meet product quality standards. In addition to performing
timeframe for improvement, is implemented. If suppliers
required testing procedures and generating accurate results,
fail to address noncompliance, and they continue to take
our partners are expected to educate manufacturers about
actions that don't reflect our social conscience, we reserve
all testing procedures. All manufacturers are expected to
the right to terminate that relationship and find a more
use Ethan Allen-approved testing facilities.
appropriate partner.
SPOTLIGHT ON HONDURAS
From daily medical care to award-winning health fairs,
the Ethan Allen medical clinic is changing lives.
Imagine having a clinic at your workplace that treats everything from injuries to chronic
disease. At Ethan Allen's Honduras manufacturing plant, on-site medical services are
part of the benefits package.
Plant manager Carolina Pascua says the clinic's biggest benefit is providing
immediate medical attention to all associates when needed. ”In most cases, they
receive immediate attention on site, without having to move to another facility.”
Eighty percent of the plant's 475 employees have received care from their medical
clinic. In addition to seeing a doctor and a nurse trained in occupational health,
associates can take advantage of educational lectures, lab tests, and seasonal health
initiatives, like flu vaccine clinics.
For three consecutive years, the clinic's health fairs have been recognized as “Best Health
Fair” by the Medical Enterprise System of the Honduran Institute of Social Security. Each
health fair offers a free breakfast as well as specialist consultations with pediatricians,
nutritionists, orthopedists, gynecologists, and more. There were a total of 816 consultative
visits during the 2016 health fair, including care from 23 dentists who performed over 90
procedures. Associates and their families also received needed health services, from eye
exams to vaccines, all free of charge.
S
O
C
I
A
L
At its core, Ethan Allen is about people. Every piece we create
begins as an idea in a human mind. Everything we manufacture is
touched by human hands. Every item we sell becomes a treasure in a
human's home or work space.
C
O
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S
Our commitment to humanity defines the way we do business. It includes
such values as managing employees fairly, caring for communities, and being
consistent in our treatment of all stakeholders.
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For instance, in our Mexico and Honduras plants, we maintain environmental, safety,
and social responsibility standards that match those in our U.S. facilities. It's not something
we do because it's legally required. It's something we do because it's the right thing to do.
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No matter where our products are made or sourced, we strive to build partnerships with
vendors that respect people, the law, and the land. To make our expectations clear, we've
developed a Supplier Code of Conduct. We've also further refined our approach through
our partnership with Disney, using their International Labor Standards as a model for our
vendors throughout the supply chain.
RESPECTING PEOPLE
RESPECTING THE LAND
Our Code of Conduct makes it clear that we expect
fair treatment for workers. Fair treatment means
providing adequate wages and benefits, and it means
understanding that child and involuntary labor are
unacceptable. Although we support apprenticeship
programs, we believe they shouldn't keep children from
completing their compulsory education requirements.
RESPECTING THE LAW
Fair competition is the key to a functioning economy
in which everyone can thrive. As an organization, Ethan
Allen does everything possible to respect the laws and
regulations of the countries in which we operate. We
ask Ethan Allen suppliers to avoid prohibited business
practices. We also expect them to refrain from engaging
in bribery or other corrupt customs. In addition, we work
closely with regulators in every country, staying abreast
of new regulations and working to ensure both product
safety and product compliance.
People depend on the Earth and its resources.
At Ethan Allen, we believe that by using land and
resources responsibly, we demonstrate our respect
for people and the environment.
In compliance with the Lacey Act, we provide
transparency regarding the sources of plants and plant
products, helping to discourage illegal logging and
helping developing countries retain control of their
natural resources. We also track the use of conflict
minerals in our supply chain, disclosing all information
to the public as required by Dodd-Frank.
In addition, we comply with local, state, federal, and
international regulations to minimize the presence of
toxins in our products and packaging. Our commitment
to environmental responsibility strikes a balance between
protecting our environment and giving our customers
what they want without compromising quality of life,
now and in the future.
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©Disney
Ethan Allen is the quintessential
American brand. We've spent 85 years
building a reputation for quality and
craftsmanship; our products do, and
always will, stand the test of time.
We've also built a business model worthy of our
namesake; we conduct business today according to
values that ensure a resource base and market for tomorrow.
The timeless values that have carried Ethan Allen this far
are the same guideposts pointing us toward a resilient
and prosperous future.
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CORPO RATE D ATA
Corporate Headquarters
ETHAN ALLEN INTERIORS INC.
PO BOX 1966
DANBURY, CT 06813-1966
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
IR@ETHANALLEN.COM
Stock Exchange Listing
NEW YORK STOCK EXCHANGE
ETHAN ALLEN INTERIORS INC.
TRADING SYMBOL: ETH
O FFICERS
as of August 31, 2017
Transfer Agent
COMPUTERSHARE INVESTOR SERVICES, LLC
211 QUALITY CIRCLE, SUITE 210
COLLEGE STATION, TX 77845
COMPUTERSHARE.COM/INVESTOR
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Mike Abdullah*
VICE PRESIDENT, RETAILER RELATIONS
D IRECTO RS
as of August 31, 2017
Farooq Kathwari
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
James B. Carlson
PARTNER, MAYER BROWN, LLP
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
Design: Ethan Allen Global, Inc.
John S. Bedford II
VICE PRESIDENT,
CORPORATE CONTROLLER
Pamela Bemus**
VICE PRESIDENT, RETAIL DIVISION
Cynthia Bero**
VICE PRESIDENT, RETAIL DIVISION
Kathy Bliss**
VICE PRESIDENT, RETAIL DIVISION
James DeBernardo**
VICE PRESIDENT, STYLE
Bridget DePasquale*
VICE PRESIDENT, MARKETING SERVICES
Douglas H. Diefenbach**
VICE PRESIDENT,
DESIGN CENTER DEVELOPMENT
John Durkott**
VICE PRESIDENT, RETAIL DIVISION
Amy Franks**
VICE PRESIDENT, RETAIL DIVISION
Daniel M. Grow
SENIOR VICE PRESIDENT,
BUSINESS DEVELOPMENT
Eric D. Koster
VICE PRESIDENT,
GENERAL COUNSEL
AND SECRETARY
Tracy Paccione
SENIOR VICE PRESIDENT,
MERCHANDISING
Robin van Puyenbroeck*
VICE PRESIDENT,
BUSINESS DEVELOPMENT
Christopher H. Robertson*
VICE PRESIDENT, LOGISTICS
Craig Stout*
VICE PRESIDENT,
PRODUCT DEVELOPMENT
Clifford Thorn***
VICE PRESIDENT,
UPHOLSTERY MANUFACTURING
Corey Whitely
EXECUTIVE VICE PRESIDENT,
ADMINISTRATION, CHIEF FINANCIAL
OFFICER AND TREASURER
Michael Worth***
VICE PRESIDENT,
CASE GOODS MANUFACTURING
*Ethan Allen Global, Inc.
**Ethan Allen Retail, Inc.
***Ethan Allen Operations, Inc.
ethanallen.com ©2017 Ethan Allen Global, Inc. ©Disney