UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March 31,~~September 30, 2019

ORor

[ ] 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.)

25 Lake Avenue Ext., Danbury, Connecticut		06811-5286
(Address of principal executive ~~office)~~offices)		(Zip Code)

(203) 743-8000

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Common ~~stock~~Stock $0.01 par value		New York Stock Exchange		ETH
(Title of each class)		(Name of each exchange on which registered)		(Trading symbol)

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 been subject to such filing requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). [X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ~~[X]~~[ ]	Accelerated filer ~~[ ]~~[X]
Non-accelerated filer [ ]	Smaller reporting company [ ]
Emerging growth 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 Exchange Act). [ ] Yes [X] No

The number of shares outstanding of the registrant’s common stock, $0.01 par value, as of ~~April 17,~~October 28, 2019 was ~~26,579,544.~~26,589,445.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements ~~(Unaudited)~~	2

Consolidated Balance Sheets (Unaudited)	2

Consolidated Statements of Comprehensive Income (Unaudited)	3

Consolidated Statements of Cash Flows (Unaudited)	4

Consolidated Statements of Shareholders’ Equity (Unaudited)	5

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15 18

Item 3. Quantitative and Qualitative Disclosures About Market Risk	25 27

Item 4. Controls and Procedures	25 28

~~PART II - OTHER INFORMATION~~ Item 1. Legal Proceedings	29

Item ~~1. Legal Proceedings~~ 1A. Risk Factors	26 29

~~Item 1A. Risk Factors~~	26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26 29

Item 3. Defaults Upon Senior Securities	26 29

Item 4. Mine Safety Disclosures	26 29

Item 5. Other Information	26 29

Item 6. Exhibits	27 30

SIGNATURES	28 31

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(In thousands, except par value)

	March 31, 2019			June 30, 2018			September 30, 2019			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	25,742		$	22,363		$	45,876		$	20,824
Accounts receivable, net of reserves of $1,818 at March 31, 2019 and $1,956 at June 30, 2018		15,838			12,364
Inventories		164,625			163,012
Accounts receivable, net								12,345			14,247
Inventories, net								151,421			162,389
Prepaid expenses and other current assets		17,905			16,686			23,189			18,830
Total current assets		224,110			214,425			232,831			216,290

Property, plant and equipment, net		260,222			267,903			244,574			245,246
Goodwill		25,388			25,388			25,388			25,388
Intangible assets		19,740			19,740			19,740			19,740
Operating lease right-of-use assets								127,837			-
Deferred income taxes		1,641			1,688			2,060			2,108
Other assets		1,731			1,289			1,469			1,579
Total assets	$	532,832		$	530,433		$	653,899		$	510,351

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	19,494		$	18,768
Accounts payable and accrued expenses							$	29,020		$	35,485
Customer deposits		62,393			61,248			65,195			56,714
Accrued compensation and benefits		22,758			18,926			22,508			21,327
Short-term debt		544			584			-			550
Accrued expenses and other current liabilities		21,263			21,734
Current operating lease liabilities								30,662			-
Other current liabilities								12,514			8,750
Total current liabilities		126,452			121,260			159,899			122,826
Long-term debt		8,658			1,096			-			516
Operating lease liabilities, long-term								119,235			-
Deferred income taxes		3,723			4,160			1,037			1,069
Other long-term liabilities		20,950			20,047			3,225			22,011
Total liabilities	$	159,783		$	146,563		$	283,396		$	146,422

Commitments and contingencies (see Note 13)
Commitments and contingencies (see Note 14)
Shareholders' equity:
Preferred stock, $0.01 par value; 1,055 shares authorized; none issued	$	-		$	-		$	-		$	-
Common stock, $0.01 par value, 150,000 shares authorized, 49,039 and 48,989 shares issued; 26,580 and 26,529 shares outstanding at March 31, 2019 and June 30, 2018, respectively		490			490
Common stock, $0.01 par value, 150,000 shares authorized, 49,050 and 49,049 shares issued; 26,588 and 26,587 shares outstanding at September 30, 2019 and June 30, 2019, respectively								491			491
Additional paid-in capital		378,756			376,950			378,082			377,913
Treasury stock, at cost: 22,460 and 22,460 shares at March 31, 2019 and June 30, 2018, respectively		(656,551	)		(656,551	)
Treasury stock, at cost: 22,462 and 22,462 shares at September 30, 2019 and June 30, 2019, respectively								(656,597	)		(656,597	)
Retained earnings		656,096			669,013			654,621			647,710
Accumulated other comprehensive loss		(5,816	)		(6,171	)		(6,150	)		(5,651	)
Total Ethan Allen Interiors Inc. shareholders' equity		372,975			383,731			370,447			363,866
Noncontrolling interests		74			139			56			63
Total shareholders' equity		373,049			383,870			370,503			363,929
Total liabilities and shareholders' equity	$	532,832		$	530,433		$	653,899		$	510,351

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)

	Three months ended						Nine months ended						Three months ended
	March 31,						March 31,						September 30,
	2019			2018			2019			2018			2019			2018
Net sales	$	177,829		$	181,419		$	562,766		$	561,202		$	173,921		$	187,785
Cost of sales		79,435			84,711			254,062			256,380			80,127			86,335
Gross profit		98,394			96,708			308,704			304,822			93,794			101,450

Selling, general and administrative expenses		87,725			92,835			270,108			271,862			86,010			89,651
Restructuring and impairment charges (gains)														(10,857	)		-
Operating income		10,669			3,873			38,596			32,960			18,641			11,799
Interest (expense), net of interest income		(62	)		(70	)		63			(49	)
Interest income, net of interest (expense)														19			(27	)
Income before income taxes		10,607			3,803			38,659			32,911			18,660			11,772
Provision for income taxes		2,629			1,187			9,651			8,018			4,554			2,932
Net income	$	7,978		$	2,616		$	29,008		$	24,893		$	14,106		$	8,840

Per share data
Basic earnings per common share:
Net income per basic share	$	0.30		$	0.10		$	1.09		$	0.91		$	0.53		$	0.33
Basic weighted average common shares		26,705			27,476			26,690			27,469			26,713			26,539
Diluted earnings per common share:
Net income per diluted share	$	0.30		$	0.09		$	1.08		$	0.90		$	0.53		$	0.33
Diluted weighted average common shares		26,751			27,692			26,749			27,725			26,750			26,940

Comprehensive income
Net income	$	7,978		$	2,616		$	29,008		$	24,893		$	14,106		$	8,840
Other comprehensive income
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments		303			1,451			355			(71	)		(499	)		1,247
Other		(20	)		(7	)		(65	)		(39	)		(7	)		(26	)
Other comprehensive income (loss), net of tax		283			1,444			290			(110	)		(506	)		1,221
Comprehensive income	$	8,261		$	4,060		$	29,298		$	24,783		$	13,600		$	10,061

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

	Nine months ended						Three months ended September 30,
	March 31,						2019			2018
Cash Flows from Operating Activities	2019			2018
Net income	$	29,008		$	24,893		$	14,106		$	8,840
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		14,849			14,955			3,976			5,000
Shared-based compensation expense		986			967			151			491
Non-cash operating lease cost								8,022			-
Deferred income taxes		(390	)		(342	)		564			99
Restructuring and impairment charges (gains)								(6,717	)		-
Restructuring payments								(4,071	)		-
Loss on disposal of property, plant and equipment		134			191			9			12
Other		(16	)		(11	)		79			104
Change in operating assets and liabilities, net of effects of acquired businesses:
Change in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable, net		(3,474	)		(3,640	)		1,767			(408	)
Inventories		(1,613	)		(14,265	)		8,999			(2,707	)
Prepaid expenses and other current assets		(1,290	)		278			(3,980	)		(1,538	)
Customer deposits		1,145			4,666			7,943			6,328
Accounts payable		726			7,719
Accounts payable and accrued expenses								(4,763	)		1,336
Accrued compensation and benefits		3,832			1,737			2,734			4,592
Accrued expenses and other current liabilities		(480	)		(1,218	)
Operating lease liabilities								(8,066	)		-
Other assets and liabilities		890			(840	)		2,643			2,291
Net cash provided by operating activities		44,307			35,090			23,396			24,440

Cash Flows from Investing Activities
Proceeds from the disposal of property, plant and equipment		1			327
Proceeds from disposal of property, plant and equipment								11,615			-
Capital expenditures		(6,990	)		(9,121	)		(3,414	)		(2,777	)
Acquisitions, net of cash acquired								(1,281	)		-
Other investing activities		124			154			20			32
Net cash used in investing activities		(6,865	)		(8,640	)
Net cash provided by (used in) investing activities								6,940			(2,745	)

Cash Flows from Financing Activities
Borrowings on revolving credit facility		16,000			-
Payments on borrowings and capital lease obligations		(8,443	)		(14,306	)
Repurchases of common stock		-			(1,100	)
Payments on debt and finance lease liabilities								(137	)		(165	)
Payment of cash dividends		(41,916	)		(24,283	)		(5,075	)		(5,065	)
Other financing activities		253			141			18			637
Net cash used in financing activities		(34,106	)		(39,548	)		(5,194	)		(4,593	)

Effect of exchange rate changes on cash and cash equivalents		43			130			(90	)		125

Net increase (decrease) in cash, cash equivalents, and restricted cash		3,379			(12,968	)
Cash, cash equivalents, and restricted cash at beginning of period		22,363			65,031
Cash, cash equivalents, and restricted cash at end of period	$	25,742		$	52,063
Net increase in cash and cash equivalents								25,052			17,227
Cash and cash equivalents at beginning of period								20,824			22,363
Cash and cash equivalents at end of period							$	45,876		$	39,590

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity (Unaudited)

(In thousands)

~~Nine months ended March 31, 2019~~

Three months ended September 30, 2019																								Three months ended September 30, 2019
												Accumulated																								Accumulated
					Additional							Other						Non-											Additional							Other						Non-
	Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total				Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total
	Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity				Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity
Balance at June 30, 2018		48,989	$	490	$	376,950		22,460	$	(656,551	)	$	(6,171	)	$	669,013		$	139		$	383,870
Balance at June 30, 2019																										49,049	$	491	$	377,913		22,462	$	(656,597	)	$	(5,651	)	$	647,710		$	63		$	363,929
Net income		-		-		-		-		-			-			8,840			-			8,840				-		-		-		-		-			-			14,106			-			14,106
Common stock issued on share-based awards		40		-		637		-		-			-			-			-			637				1		-		18		-		-			-			-			-			18
Share-based compensation expense		-		-		491		-		-			-			-			-			491				-		-		151		-		-			-			-			-			151
Impact of ASU 2016-02 adoption, net of tax																										-		-		-		-		-			-			(1,585	)		-			(1,585	)
Cash dividends declared		-		-		-		-		-			-			(5,072	)		-			(5,072	)			-		-		-		-		-			-			(5,610	)		-			(5,610	)
Other comprehensive income (loss)		-		-		-		-		-			1,247			-			(26	)		1,221				-		-		-		-		-			(499	)		-			(7	)		(506	)
Balance at September 30, 2018		49,029	$	490	$	378,078		22,460	$	(656,551	)	$	(4,924	)	$	672,781		$	113		$	389,987
Net income		-		-		-		-		-			-			12,190			-			12,190
Common stock issued on share-based awards		9		-		164		-		-			-			-			-			164
Share-based compensation expense		-		-		316		-		-			-			-			-			316
Cash dividends declared		-		-		-		-		-			-			(31,778	)		-			(31,778	)
Other comprehensive income (loss)		-		-		-		-		-			(1,195	)		-			(19	)		(1,214	)
Balance at December 31, 2018		49,038	$	490	$	378,558		22,460	$	(656,551	)	$	(6,119	)	$	653,193		$	94		$	369,665
Net income		-		-		-		-		-			-			7,978			-			7,978
Common stock issued on share-based awards		2		-		19		-		-			-			-			-			19
Share-based compensation expense		-		-		179		-		-			-			-			-			179
Cash dividends declared		-		-		-		-		-			-			(5,075	)		-			(5,075	)
Other comprehensive income (loss)		-		-		-		-		-			303			-			(20	)		283
Balance at March 31, 2019		49,039	$	490	$	378,756		22,460	$	(656,551	)	$	(5,816	)	$	656,096		$	74		$	373,049
Balance at September 30, 2019																										49,050	$	491	$	378,082		22,462	$	(656,597	)	$	(6,150	)	$	654,621		$	56		$	370,503

~~Nine months ended March 31, 2018~~

Three months ended September 30, 2018																										Three months ended September 30, 2018
														Accumulated																								Accumulated
					Additional									Other						Non-											Additional							Other						Non-
	Common Stock				Paid-in			Treasury Stock						Comprehensive			Retained			Controlling			Total				Common Stock				Paid-in		Treasury Stock					Comprehensive			Retained			Controlling			Total
	Shares		Par Value		Capital			Shares			Amount			Loss			Earnings			Interests			Equity				Shares		Par Value		Capital		Shares		Amount			Loss			Earnings			Interests			Equity
Balance at June 30, 2017		48,980	$	490	$	377,550			21,533		$	(635,179	)	$	(4,131	)	$	661,976		$	190		$	400,896
Net income		-		-		-			-			-			-			7,415			-			7,415
Common stock issued on share-based awards		-		-		4			-			-			-			-			-			4
Share-based compensation expense		-		-		444			-			-			-			-			-			444
Purchase/retirement of company stock		-		-		(1,747	)		(24	)		647			-			-			-			(1,100	)
Cash dividends declared		-		-		-			-			-			-			(5,243	)		-			(5,243	)
Other comprehensive income (loss)		-		-		-			-			-			(130	)		-			(14	)		(144	)
Balance at September 30, 2017		48,980	$	490	$	376,251			21,509		$	(634,532	)	$	(4,261	)	$	664,148		$	176		$	402,272
Balance at June 30, 2018																												48,989	$	490	$	376,950		22,460	$	(656,551	)	$	(6,171	)	$	669,013		$	139		$	383,870
Net income		-		-		-			-			-			-			14,862			-			14,862				-		-		-		-		-			-			8,840			-			8,840
Common stock issued on share-based awards		5		-		133			-			-			-			-			-			133				40		-		637		-		-			-			-			-			637
Share-based compensation expense		-		-		638			-			-			-			-			-			638				-		-		491		-		-			-			-			-			491
Cash dividends declared		-		-		-			-			-			-			(13,801	)		-			(13,801	)			-		-		-		-		-			-			(5,072	)		-			(5,072	)
Other comprehensive income (loss)		-		-		-			-			-			(1,392	)		-			(18	)		(1,410	)			-		-		-		-		-			1,247			-			(26	)		1,221
Balance at December 31, 2017		48,985	$	490	$	377,022			21,509		$	(634,532	)	$	(5,653	)	$	665,209		$	158		$	402,694
Net income		-		-		-			-			-			-			2,616			-			2,616
Common stock issued on share-based awards		-		-		4			-			-			-			-			-			4
Share-based compensation expense		-		-		(115	)		-			-			-			-			-			(115	)
Cash dividends declared		-		-		-			-			-			-			(5,244	)		-			(5,244	)
Other comprehensive income (loss)		-		-		-			-			-			1,451			-			(7	)		1,444
Balance at March 31, 2018		48,985	$	490	$	376,911			21,509		$	(634,532	)	$	(4,202	)	$	662,581		$	151		$	401,399
Balance at September 30, 2018																												49,029	$	490	$	378,078		22,460	$	(656,551	)	$	(4,924	)	$	672,781		$	113		$	389,987

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1)	~~Basis~~Organization and Nature of ~~Presentation~~Business

Founded in 1932 ~~Ethan Allen Interiors Inc. is a~~and incorporated in Delaware ~~corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of~~in 1989, Ethan Allen Interiors Inc., through its ~~wholly owned~~wholly-owned subsidiary, Ethan Allen Global, Inc. ~~("Global")~~, and ~~Global’s~~Ethan Allen Global, Inc.’s subsidiaries (collectively, “we,” “us,” “our,” “Ethan ~~Allen,”~~Allen” or the “Company”)~~. All intercompany accounts~~, is a leading interior design company, manufacturer and ~~transactions have been eliminated~~retailer in the ~~consolidated financial statements.~~home furnishings marketplace. Today we are a global luxury international home fashion brand that is vertically integrated from design through delivery, which affords our clientele a value proposition of style, quality and price. We provide complimentary interior design service to our customers and sell a full range of furniture products and decorative accents through a retail network of approximately 300 design centers in the United States and abroad as well as online at ethanallen.com. The design centers represent a mix of independent licensees and Company-owned and operated locations. Our Company operates retail design centers located in the United States and Canada. The independently operated design centers are located in the United States, Asia, the Middle East and Europe. We also own and operate nine manufacturing facilities, including six manufacturing plants in the United States plus two plants in Mexico and one in Honduras.

(2)	Interim Basis of Presentation

Use of Estimates.We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), 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 net sales and expenses during the reporting period. Due to 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, inventory obsolescence, useful lives for property, plant and equipment, goodwill and indefinite-lived intangible asset impairment analyses, business insurance retention reserves, tax valuation allowances, the evaluation of uncertain tax positions and other loss reserves.

~~Certain reclassifications~~Principles of Consolidation.Ethan Allen conducts business globally and has strategically aligned its business into two reportable segments: Wholesale and Retail. These two segments represent strategic business areas of our vertically integrated enterprise that operate separately and provide their own distinctive services. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany activity and balances have been ~~made to~~eliminated from the ~~amounts in prior periods in order to conform to the current period’s presentation.~~

~~(2)~~

~~Interim Financial Presentation~~

consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2019 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our fiscal ~~2018~~2019 Annual Report on Form 10-K (the ~~“2018~~“2019 Annual Report on Form 10-K”).

Reclassifications. Certain reclassifications have been made to the amounts in prior periods in order to conform to the current period’s presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results.

The Company has evaluated subsequent events through the date that the financial statements were issued.

(3)	Recent Accounting Pronouncements

As of March 31, 2019, we implemented all applicable new accounting standards and updates issued by the Financial Accounting Standards Board (“FASB”) that were in effect. There were no new standards or updates adopted during the first nine months of fiscal 2019 that had a material impact on our consolidated financial statements.

New Accounting Standards or Updates Recently Adopted

~~Revenue Recognition -~~ Leases – In ~~May 2014,~~February 2016, the FASB issued accounting standards update (“ASU”) ~~2014-09,~~2016-02, ~~Revenue from Contracts with Customers~~Leases (Topic 842), ~~(Accounting Standards Codification Topic 606 (“ASC 606”)), which~~an update related to accounting for leases. This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the ~~amount of revenue~~balance sheet and to ~~which it expects~~disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. In July 2018, the FASB approved an amendment to be entitled for the transfer of promised goods or services to customers. The new standard supersedes virtually all existing authoritative accounting guidance on revenue recognition and requires additional disclosures and greater use of estimates and judgments. We adopted the new ~~standard in~~guidance that allows companies the ~~first quarter~~option of ~~fiscal 2019. We reviewed substantially all of our contracts and revenue streams and determined that while~~using the ~~application~~effective date of the new standard ~~did not have~~as the initial application (at the beginning of the period in which it is adopted, rather than at the beginning of the earliest comparative period) and to recognize the effects of applying the new ASU as a ~~material change in~~cumulative effect adjustment to the ~~amount of~~opening balance sheet or ~~timing for recognizing revenue, it did impact our financial statement disclosures related to net sales and related accounts. See Note 4 for further details on these new disclosures.~~retained earnings.

~~Restricted Cash~~ ~~- In November 2016, the FASB issued ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash~~, which is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the cash flow 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 had not previously included restricted cash as a component of cash and cash equivalents as presented on its consolidated statement of cash flows. We adopted the new standard in the first quarter of fiscal 2019, under the retrospective adoption method, and prior year restricted cash has been reclassified to conform to current year presentation. See Note 5 for further details.

~~Share-Based Payments~~ ~~- In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting~~, which amended the scope of modification accounting for share-based payment arrangements. The guidance focused on changes to the terms or conditions of share-based payment awards that would require the application of modification accounting and specifies that an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. We adopted ASU ~~2017-09 in~~2016-02 as of July 1, 2019 using the ~~first quarter~~modified retrospective method and have not restated comparative periods. The Company elected the package of ~~fiscal~~practical expedients upon adoption, which permits us to (i) not reassess whether any expired or existing contracts are or contain leases, (ii) to not reassess lease classification for any expired or existing leases, and (iii) to not reassess treatment of initial direct costs, if any, for any expired or existing leases. In addition, we elected not to separate lease and non-lease components when determining the ROU asset and lease liability for our design center real estate leases and did not elect the hindsight practical expedient, which would have allowed us to use hindsight when determining the remaining lease term as of the adoption date on July 1, 2019. ~~The adoption~~Lastly, we elected the short-term lease exception policy for all leases, permitting us to exclude the recognition requirements of this standard ~~had no impact on our consolidated financial statements.~~from leases with initial terms of 12 months or less.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Upon adoption we recognized operating lease assets of $129.7 million and operating lease liabilities of $149.7 million on our consolidated balance sheet. In addition, $20.0 million of deferred rent and various lease incentives, which were recorded as other long-term liabilities as of June 30, 2019 were reclassified as a component of the right-of-use assets upon adoption. The Company also recognized a cumulative adjustment as of July 1, 2019, which decreased opening retained earnings by $1.6 million due to the impairment of certain right-of-use assets. The adoption of the new standard did not have a material impact on the consolidated statements of operations or cash flows. See Note 6 for further details on new disclosures required under ASU 2016-02.

Recent Accounting Standards or Updates Not Yet Effective

~~Leases -~~ ~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~, an update related to accounting for leases. The standard introduces a lessee model that will require lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months. Lessors will remain largely unchanged from current GAAP. In addition, ASU 2016-02 will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The Company is required to adopt ASU 2016-02 in the first quarter of fiscal 2020 and expects to apply the modified retrospective approach, which allows for a cumulative-effect adjustment at the beginning of the period of adoption and does not require application of the guidance to comparative periods. We are currently evaluating the impact of this accounting standards update, which involves gathering lease data, reviewing our lease portfolio, implementing a third-party lease accounting software and completing an impact assessment with respect to the adoption of the provisions of the new standard. We currently expect the adoption to have a material impact to our consolidated balance sheet in order to recognize the right of use assets and related liabilities, including enhanced disclosures. However, we do not expect the adoption to have a material impact on our consolidated statements of comprehensive income or cash flows.

Goodwill Impairment Test - In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the requirement for companies to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021 and we do not expect the adoption to have a material impact on our consolidated financial statements.

Implementation Costs in a Cloud Computing Arrangement - In August 2018, the FASB issued ASU 2018-15, Cloud Computing Arrangements for Service Contracts, an update related to a client’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs will be expensed over the term of the arrangement. This accounting standards update will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are currently evaluating the impact of this accounting standards update, but do not expect the adoption to have a material impact on our consolidated financial statements.

No other new accounting pronouncements issued or effective as of ~~March 31,~~September 30, 2019 have had or are expected to have an impact on our consolidated financial statements.

(4)	Revenue Recognition

We implemented ASC 606 in the first quarter of fiscal 2019 using the cumulative effect approach, which required us to apply the new guidance retrospectively to revenue transactions completed on or after July 1, 2018. Adopting this new standard did not have a material impact on our consolidated financial statements, but did result in enhanced disclosures.

Our reported revenue (net sales) consist substantially of product sales. We report product sales net of discounts and recognize them at the point in time when control transfers to the customer. For sales to our customers in our wholesale segment, control typically transfers when the product is shipped. For sales in our retail segment, control generally transfers upon delivery to the customer. We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales. We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes). We do not adjust net sales for the effects of financing components as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.

Estimated refunds for sales returns and allowances are ~~recorded using~~based on our historical return patterns. ~~Under the new standard, we~~We record these estimated refunds ~~for sales returns~~ on a gross basis rather than on a net basis and have recorded an asset for product we expect to receive back from customers in Prepaid expenses and other current assets and a corresponding refund liability in ~~Accrued expenses and other~~Other current ~~liabilities~~liabilities on our consolidated balance sheets. At ~~March 31,~~September 30, 2019 and June 30, 2019, these amounts were immaterial.

In many cases we receive deposits from customers before we have transferred control of our product to our customers, resulting in contract liabilities. These contract liabilities are reported as a current liability in Customer Depositson our consolidated balance sheets. At June 30, ~~2018~~2019 we had customer deposits of ~~$61.2~~$56.7 million, of which we recognized $46.5 million as net sales ~~of $1.4 million and $59.3 million respectively,~~upon delivery to the customer during the three ~~and nine~~ months ended ~~March 31,~~September 30, 2019. Customer deposits totaled ~~$62.4~~$65.2 million at ~~March 31,~~September 30, 2019.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~Upon adoption of ASC 606, we have elected the following accounting policies and practical expedients:~~

We recognize shipping and handling expense as fulfillment activities (rather than as a promised good or service) when the activities are performed even if those activities are performed after the control of the good has been transferred. Accordingly, we record the expenses for shipping and handling activities at the same time we recognize net sales.

We exclude from the measurement of the transaction price all taxes imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer, including sales, use, excise, value-added, and franchise taxes (collectively referred to as sales taxes).

We do not adjust net sales for the effects of financing components if the contract has a duration of one year or less, as we believe that we will receive payment from the customer within one year of when we transfer control of the related goods.

The following table disaggregates net sales by product category by segment for the three months ended ~~March 31, 2019:~~September 30, 2019 (in thousands):

(Unaudited, amounts in thousands)

Wholesale

Retail

Total

Upholstery furniture
$ 53,071 $ 62,351 $ 115,422
Case goods furniture
37,575 40,958 78,533
Accents
19,516 30,028 49,544
Other
(1,795 ) 5,610 3,815
Total before intercompany eliminations
$ 108,367 $ 138,947 247,314
Eliminations
(69,485 )
Consolidated Net Sales
$ 177,829

~~The following table disaggregates net sales by product category by segment for the nine months ended March 31, 2019:~~

(Unaudited, amounts in thousands)	Wholesale			Retail		Total
									Wholesale			Retail		Total
Upholstery furniture(1)	$	162,817		$	195,667	$	358,484		$	50,020		$	63,236	$	113,256
Case goods furniture(2)		116,326			131,728		248,054			34,029			38,760		72,789
Accents(3)		58,774			97,644		156,418			17,997			29,982		47,979
Other(4)		(3,820	)		17,630		13,810			(717	)		5,288		4,571
Total before intercompany eliminations	$	334,097		$	442,669		776,766		$	101,329		$	137,266		238,595
Eliminations							(214,000	)
Consolidated Net Sales						$	562,766
Intercompany eliminations⁽⁵⁾															(64,674	)
Consolidated net sales														$	173,921

-(1)

Upholstery furniture includes fabric-covered items such as sleepers, recliners and other motion furniture, chairs, ottomans, custom pillows, sofas, loveseats, cut fabrics and leather.

-(2)

Case goods furniture includes items such as beds, dressers, armoires, tables, chairs, buffets, entertainment units, home office furniture, and wooden accents.

-(3)

Accents includes items such as window treatments and drapery hardware, wall décor, florals, lighting, clocks, mattresses, bedspreads, throws, pillows, decorative accents, area rugs, wall coverings and home and garden furnishings.

-(4)

Other includes ~~net sales for~~ product delivery sales, the Ethan Allen Hotel room rentals and banquets, sales of third-party furniture protection plans ~~non-inventoried parts, and consulting~~ and other ~~fees, net of~~miscellaneous product sales less prompt payment discounts, sales allowances and other ~~sales~~ incentives.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

(5)

~~Restricted Cash~~Represents the elimination of all intercompany wholesale segment sales to the retail segment during the period presented.

Prior to June 30, 2018 we held restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our worker’s compensation and other insurance liabilities. By June 30, 2018, this obligation had been reduced to $5.9 million, which was then exchanged for a letter of credit for the benefit of this provider, and the restricted cash and investments balance was reduced to zero.

~~The following table presents the components of total cash, cash equivalents, and restricted cash as set forth in our consolidated statements of cash flows (in thousands).~~

March 31,

June 30,

March 31,

June 30,

2019

2018

2018

2017

Cash and cash equivalents
$ 25,742 $ 22,363 $ 44,977 $ 57,701
Restricted cash
- - 7,086 7,330
Total cash, cash equivalents, and restricted cash
$ 25,742 $ 22,363 $ 52,063 $ 65,031

~~(6)~~(5)

Inventories

Inventories are stated at the lower of cost ~~(first-in, first-out) and~~(on first-in, first-out basis) or net realizable value. 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).~~inventory.

Inventories at ~~March 31,~~September 30, 2019 and June 30, ~~2018~~2019 are summarized as follows (in thousands):

	March 31,			June 30,			September 30,			June 30,
	2019			2018			2019			2019
Finished goods	$	126,673		$	124,640		$	119,272		$	128,047
Work in process		11,965			12,057			9,545			9,185
Raw materials		27,719			27,947			24,114			26,661
Valuation allowance		(1,732	)		(1,632	)
Inventories	$	164,625		$	163,012
Inventory reserve								(1,510	)		(1,504	)
Inventories, net							$	151,421		$	162,389

(6)

Leases

During the first quarter of fiscal 2020, we adopted ASU 2016-02 and all related amendments. The guidance requires lessees to recognize substantially all leases on their balance sheet as a right-of-use (“ROU”) asset and a lease liability.

Lease Accounting Policy

The Company has operating leases for many of its design centers that expire at various dates through fiscal 2040. In addition, we also lease certain tangible assets, including computer equipment and vehicles with lease terms ranging from three to five years. We determine if a contract contains a lease at inception based on our right to control the use of an identified asset and our right to obtain substantially all of the economic benefits from the use of that identified asset. Certain operating leases have renewal options and rent escalation clauses as well as various purchase options. We assess these options to determine if we are reasonably certain of exercising these options based on all relevant economic and financial factors. Any options that meet these criteria are included in the lease term at lease commencement.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Lease right-of-use assets represent the right to use an underlying asset pursuant to the lease for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Lease right-of-use assets and lease liabilities are recognized at the commencement of an arrangement where it is determined at inception that a lease exists. These assets and liabilities are initially recognized based on the present value of lease payments over the lease term calculated using our incremental borrowing rate generally applicable to the location of the lease right-of-use asset, unless an implicit rate is readily determinable. We combine lease and certain non-lease components for our design center real estate leases in determining the lease payments subject to the initial present value calculation. Lease right-of-use assets include upfront lease payments and exclude lease incentives, where applicable. Lease terms include options to extend or terminate the lease when it is reasonably certain that those options will be exercised.

Lease expense for operating leases consists of both fixed and variable components. Expense related to fixed lease payments are recognized on a straight-line basis over the lease term. Variable lease payments are generally expensed as incurred, where applicable, and include certain index-based changes in rent, certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease. Leases with an initial term of twelve months or less are not recorded on the balance sheet. In addition, certain of our equipment lease agreements include variable lease payments, which are based on the usage of the underlying asset. The variable portion of payments are not included in the initial measurement of the asset or lease liability due to uncertainty of the payment amount and are recorded as lease expense in the period incurred.

We have elected the short-term lease exemption, whereby leases with initial terms of one year or less are not capitalized and instead expensed on a straight-line basis over the lease term.

Key Estimates and Judgments

Key estimates and judgments in applying ASU 2016-02 include how the Company determines the discount rate to discount the unpaid lease payments to present value and the lease term.

ASC 842 requires companies to use the rate implicit in the lease whenever that rate is readily determinable and if the interest rate is not readily determinable, then a lessee may use its incremental borrowing rate. Most of our leases do not have an interest rate implicit in the lease. As a result, for purposes of measuring our ROU asset and lease liability, we determined our incremental borrowing rate by computing the rate of interest that we would have to pay to (i) borrow on a collateralized basis (ii) over a similar term (iii) at an amount equal to the total lease payments and (iv) in a similar economic environment. We used the incremental borrowing rates we determined as of July 1, 2019 for operating leases that commenced prior to that date. In the case an interest rate is implicit in a lease we will use that rate as the discount rate for that lease. The lease term for all of our lease arrangements include the noncancelable period of the lease plus, if applicable, any additional periods covered by an option to extend the lease that is reasonably certain to be exercised by the Company. Our leases generally do not include termination options for either party to the lease or restrictive financial or other covenants. Some of our leases contain variable lease payments based on a Consumer Price Index or percentage of sales, which are excluded from the measurement of the lease liability.

The Company's lease terms and discount rates are as follows:

	September 30, 2019
Weighted-average remaining lease term (in years)
Operating leases		6.7
Finance leases		1.8
Weighted-average discount rate
Operating leases		3.7	%
Finance leases		4.6	%

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The following table discloses the location and amount of our operating and finance lease costs within our consolidated statement of comprehensive income (in thousands):

	Statement of Comprehensive Income Location	Three months ended September 30, 2019
Operating lease cost	Selling, general and administrative (“SG&A”)	$	8,022
Finance lease cost:
Depreciation of property	SG&A		146
Interest on lease liabilities	Interest income, net of interest (expense)		9
Short-term lease cost	SG&A		387
Variable lease cost⁽¹⁾	SG&A		2,463
Less: Sublease income	SG&A		(506	)
Total lease expense		$	10,521

(1)

Variable lease payments include index-based changes in rent, maintenance, real estate taxes, insurance and other charges included in the lease.

Operating lease rent expense during the three months ended September 30, 2018, as reported within SG&A was $8.0 million, net of sublease rental income of $0.5 million.

The following table discloses the operating and finance lease assets and liabilities recognized within our consolidated balance sheet as of September 30, 2019 (in thousands):

	Consolidated Balance Sheet Location	September 30, 2019
Assets
Operating leases	Operating lease right-of-use assets (non-current)	$	127,837
Finance leases	Property, plant and equipment, net		953
Total lease assets		$	128,790

Liabilities
Current:
Operating leases	Current operating lease liabilities	$	30,662
Finance leases	Other current liabilities		582
Noncurrent:
Operating leases	Operating lease liabilities, long-term		119,235
Finance leases	Other long-term liabilities		347
Total lease liabilities		$	150,826

The ROU assets by segment are as follows as of September 30, 2019 (in thousands):

Retail	$	127,904
Wholesale		886
Total ROU assets	$	128,790

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under noncancelable leases with terms of more than one year to the total lease liabilities recognized on the condensed consolidated balance sheets as of September 30, 2019 (in thousands):

Fiscal Year	Operating Leases			Finance Leases
Remainder of fiscal 2020 (nine months)	$	25,971		$	441
2021		31,627			440
2022		27,563			59
2023		21,189			20
2024		16,100			-
Thereafter		49,489			-
Total undiscounted future minimum lease payments		171,939			960
Less: imputed interest		(22,042	)		(31	)
Total present value of lease obligations	$	149,897		$	929

At September 30, 2019, we did not have any significant operating or finance leases that had not commenced.

Other information for the Company's leases is as follows (in thousands):

	Three months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	8,851
Operating cash flows from finance leases	$	147
Operating lease assets obtained in exchange for new operating lease liabilities	$	6,916

At the beginning of fiscal 2020, the Company adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. As of June 30, 2019, future minimum payments under non-cancelable leases were as follows (in thousands):

Fiscal Year	Operating Leases		Finance Leases ⁽¹⁾
2020	$	33,761	$	550
2021		30,534		437
2022		26,443		60
2023		20,276		19
2024		15,345		-
Thereafter		43,500		-
Total	$	169,859	$	1,066

(1)

As of June 30, 2019, our capital lease obligations were $1.1 million of which the current and long-term portions were included within short-term debt and long-term debt, respectively, in the consolidated balance sheet. Monthly minimum lease payments were accounted for as principal and interest payments.

(7)	Income Taxes

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual ~~pre-tax~~operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or ~~changes~~change in judgment as to the realizability of deferred tax assets. The Company identifies items which are non-recurring in nature and treats these as discrete events. The tax effect of such items is recorded in the quarter in which the related events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly quarter over quarter.

The Company conducts business globally and, as a result, the Company and its subsidiaries ~~file~~files income tax returns in the U.S. and in various state and foreign jurisdictions. In the normal course of business, the Company is subject to periodic examination in such domestic and foreign jurisdictions by tax authorities. The Company and certain subsidiaries are currently under audit in the U.S. for fiscal 2016. While the amount of uncertain tax impacts 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. It is reasonably possible that some of these audits may be completed during the next twelve months and that various issues relating to uncertain tax ~~positions~~impacts will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

~~The Company is~~

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

We are subject to a U.S. federal statutory tax rate of 21% for the fiscal year ending June 30, ~~2019 and thereafter, and a blended federal tax rate of 28% for fiscal 2018, due to changes made to the U.S. Internal Revenue Code.~~2020. The Company’s consolidated effective tax rate was ~~24.8% and 25.0% for the three and nine months ended March 31, 2019 and 31.2% and~~ 24.4% for the three ~~and nine~~ months ended ~~March 31, 2018, respectively.~~September 30, 2019 compared with 24.9% in the year ago first quarter. The current ~~period’s~~fiscal year’s effective tax rate primarily includes a provision for income tax on the taxable year’s income, ~~including federal, state and local taxes,~~ tax expense on the ~~establishment and~~ maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax ~~positions, partially offset by the reversal of various uncertain tax~~ positions. The prior ~~period’s~~quarter’s effective tax rate primarily includes ~~a provision for income~~ tax expense on the taxable year’s net income, ~~remeasurement~~tax expense on the cancelation of ~~deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was enacted in December 2017,~~stock options and tax and interest expense on uncertain tax ~~positions, partially offset by the reversal of various uncertain tax~~ positions.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

(8)

Debt

Total debt obligations at ~~March 31,~~September 30, 2019 and June 30, ~~2018~~2019 consist of the following (in thousands):

	March 31,		June 30,		September 30,		June 30,
	2019		2018		2019		2019

Borrowings under revolving credit facility	$	8,000	$	-	$	-	$	-
Capital leases(1)		1,202		1,680		-		1,066
Total debt		9,202		1,680		-		1,066
Less current maturities		544		584		-		550
Total long-term debt	$	8,658	$	1,096	$	-	$	516

(1)

Capital leases were previously reported as debt as of June 30, 2019. Upon the adoption of the new leasing standard, the Company reclassified its capital lease obligations from short and long-term debt to other current liabilities and other long-term liabilities, respectively. Refer to Note 6 for further details regarding capital lease obligations.

Revolving Credit Facility

On December 21, 2018, the Company and most of its domestic subsidiaries (the “Loan Parties”) entered into a Second Amended and Restated Credit Agreement (the “Facility”). The Facility amends and restates the existing Amended and Restated Credit Agreement, dated as of October 21, 2014, as amended. The Facility provides a revolving credit line of up to $165 million, subject to borrowing base availability, and extends the maturity of the Facility to December 21, 2023. We incurred financing costs of $0.6 million under the Facility, which are being amortized over the remaining life of the Facility using the effective interest method.

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 2.0%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 1.0%.

The availability of credit at any given time under the Facility will be constrained by the terms and conditions of the Facility, including the amount of collateral available, a borrowing base formula based upon numerous factors including the value of eligible inventory and eligible accounts receivable, and other restrictions contained in the Facility. All obligations under the Facility are secured by assets of the Loan Parties including inventory, receivables and certain types of intellectual property.

Borrowings under the Facility

~~To fund a portion~~As of ~~the special cash dividend paid to shareholders in January 2019, we borrowed $16.0 million from the Facility having a maturity date of December 21, 2023. By March 31,~~September 30, 2019, we had ~~repaid $8.0 million of~~no borrowings outstanding under the total borrowed from cash generated from operating activities. The debt bears interest on the outstanding principal amount at a rate equal to the one-month LIBOR rate of 2.5% plus a spread using a debt leverage pricing grid currently at 1.5%. Interest on the loan outstanding is payable monthly in arrears and on the maturity date.

~~The outstanding borrowing amount of $8.0 million is reported as~~ ~~Long-term debt~~ within the consolidated balance sheet at March 31, 2019. For the nine months ended March 31, 2019, we recorded interest expense of $0.1 million on our outstanding debt amount. The principal balance is payable in full on the maturity date.Facility.

Debt Obligations

~~The following table summarizes, as~~As of ~~March 31,~~September 30, 2019, ~~the timing of cash payments related to our~~we have no current outstanding long-term debt ~~obligations for~~obligations. Interest expense incurred during the ~~remaining~~ three months ~~of fiscal 2019, and each of the five fiscal years subsequent to June~~ended September 30, 2019 and ~~thereafter (in thousands).~~

Periods ending June 30,

2019 (remaining three months)
$ 135
2020
550
2021
437
2022
60
2023
20
2024 and thereafter
8,000
Total scheduled debt payments
$ 9,202

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

2018 were immaterial.

Covenants and Other Ratios

The Facility contains various restrictive and affirmative covenants, including required financial reporting, limitations on the ability to grant liens, make loans or other investments, incur additional debt, issue additional equity, merge or consolidate with or into another person, sell assets, pay dividends or make other distributions or enter into transactions with affiliates, along with other restrictions and limitations similar to those frequently found in credit agreements of this type and size. Loans under the Facility may become immediately due and payable upon certain events of default (including failure to comply with covenants, change of control or cross-defaults) as set forth in the Facility.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

The Facility does not contain any significant financial ratio covenants or coverage ratio covenants other than a fixed charge coverage ratio covenant based on the ratio of (a) EBITDA, plus cash Rentals, minus Unfinanced Capital Expenditures to (b) Fixed Charges, as such terms are defined in the Facility (the “FCCR Covenant”). The FCCR Covenant only applies in certain limited circumstances, including when the unused availability under the Facility drops below $18.5 million. The FCCR Covenant ratio is set at 1.0 and measured on a trailing twelve-month basis.

At ~~both March 31,~~September 30, 2019 and June 30, ~~2018,~~2019, there was ~~$6.2~~$5.9 million and $6.1 million, respectively, of standby letters of credit outstanding under the Facility. Total availability under the Facility was ~~$150.8~~$148.4 million at ~~March 31,~~September 30, 2019 and ~~$108.8~~$158.9 at June 30, ~~2018.~~2019. At both ~~March 31,~~September 30, 2019 and June 30, ~~2018,~~2019, we were in compliance with all the covenants under the Facility.

(9)	~~Share-Based Compensation~~Restructuring and Impairment Activities

~~All options are issued~~Optimization of Manufacturing and Logistics

During the fourth quarter of fiscal 2019, we initiated restructuring plans to consolidate our manufacturing and logistics operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. As of June 30, 2019, we permanently ceased operations at our Passaic, New Jersey property and, for the most part, transferred our Old Fort, North Carolina case goods manufacturing operations to our other existing operations. As a result, approximately 325 of our associates in Old Fort and 55 associates in Passaic were terminated.

During the first quarter of fiscal 2020, we continued with this optimization project as we converted the Old Fort facility into a distribution center and expanded our existing Maiden, North Carolina manufacturing campus while finalizing severance and other exit costs associated with our case goods operations. In connection with the foregoing first quarter fiscal 2020 initiatives, we recorded pre-tax restructuring and other exit charges totaling $1.7 million, consisting of $1.1 million in manufacturing variances associated with the closing ~~stock price on each grant date~~of the Passaic property and ~~have a contractual term~~the repurposing of ~~10 years. A summary~~the Old Fort case goods manufacturing operations, $0.4 million in employee severance and other payroll and benefit costs, and $0.2 million of ~~stock option activity during~~other exit costs. The manufacturing overhead variances of $1.1 million were recorded within Cost of Sales with the ~~nine months ended March 31, 2019 is presented below.~~

Weighted

Average

Options

Exercise Price

Outstanding at June 30, 2018
561,595 $ 21.70
Granted
25,590 $ 23.45
Exercised
(50,250 ) $ 15.89
Canceled (forfeited/expired)
(140,364 ) $ 23.03
Outstanding at March 31, 2019
396,571 $ 22.07
Exercisable at March 31, 2019
316,699 $ 20.91

~~A summary~~remaining $0.6 million recorded within the line item Restructuring and Impairment Charges (Gains) in the consolidated statements of ~~stock unit awards activity during the nine months ended March 31, 2019 is presented below.~~

Weighted

Stock

Average

Unit

Grant Date

Awards

Fair Value

Outstanding at June 30, 2018
330,369 $ 26.15
Granted
105,644 18.60
Vested
- -
Canceled (forfeited/expired)
(33,227 ) 23.36
Outstanding at March 31, 2019
402,786 $ 24.40

~~There were no restricted stock awards outstanding at March 31, 2019.~~comprehensive income.

~~At March 31,~~As part of our optimization plans, we completed the sale of our Passaic property in September 2019 ~~there were 1,489,996 shares~~to an independent third party and received $12.4 million in cash less certain adjustments set forth in the purchase and sale agreement, including $0.9 million in selling and other closing costs. As a result of ~~common stock available for future issuance pursuant~~the sale, the Company recognized a pre-tax gain of $11.5 million in the first quarter of fiscal 2020, which was recorded within the line item Restructuring and Impairment Charges (Gains) in the consolidated statements of comprehensive income.

Inventory Write-downs

During the first quarter of fiscal 2020 we recorded a non-cash charge of $3.1 million related to the ~~Stock Incentive Plan.~~write-down and disposal of certain slow moving and discontinued inventory items, which was due to actual demand and forecasted market conditions for these inventory items being less favorable than originally estimated. Of the total inventory write-down, $2.7 million related to slow moving finished goods with the remaining $0.4 million consisting of raw materials that were disposed. The non-cash inventory write-down was recorded in the consolidated statement of comprehensive income within the line item Cost of Sales.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Summary of Restructuring, Impairments and Other related charges (gains)

Restructuring, impairment and other related costs incurred during the first quarter of fiscal 2020 were as follows (in thousands):

	Three months ended
	September 30, 2019
Optimization of manufacturing and logistics	$	640
Gain on sale of Passaic property		(11,497	)
Total Restructuring and other exit costs (income)	$	(10,857	)
Manufacturing overhead costs		1,052	⁽¹⁾
Inventory write-downs		3,088	⁽¹⁾
Total	$	(6,717	)

(1)	Manufacturing overhead costs and inventory write-downs are reported within Cost of Sales in the consolidated statements of comprehensive income.

Restructuringand Other Related Charges Rollforward

The Company’s restructuring activity is summarized in the table below (in thousands):

			Fiscal 2020 Activity
Optimization of Manufacturing and Logistics	Balance June 30, 2019		New Charges (Income)			Non-Cash			(Payments) Receipts			Balance Sept 30, 2019
Employee severance, other payroll and benefit costs	$	1,714	$	449		$	-		$	(2,002	)	$	161	⁽¹⁾
Manufacturing overhead costs		-		1,052			-			(1,052	)		-
Gain on sale of Passaic property		-		(11,497	)		245			11,612			(130	) ⁽²⁾
Other exit and relocation costs		-		191			(465	)		(697	)		(41	) ⁽³⁾
Sub-total	$	1,714	$	(9,805	)	$	(220	)	$	7,861		$	(10	)

Inventory write-downs
Inventory write-downs	$	-	$	3,088		$	3,088		$	-		$	-

Other Restructuring and Impairment Charges
Lease exit costs (remaining lease rentals)	$	3,145	$	-		$	2,878		$	(267	)	$	-	⁽⁴⁾
Other charges (income)		224		-			-			(53	)		171	⁽⁵⁾
Sub-total		3,369		-			2,878			(320	)		171
Total Restructuring, Impairments and other exit costs	$	5,083	$	(6,717	)	$	5,746		$	7,541		$	161

(1)	Remaining severance expected to be paid during the second quarter of fiscal 2020. The balance of $0.2 million is reported within Accrued compensation and benefits in our consolidated balance sheet as of September 30, 2019.

(2)	The remaining balance of $0.1 million as of September 30, 2019 represents prepaid income taxes from the sale of the Passaic property, which are recorded as a reduction to our income taxes payable balance reported in Other current liabilities.

(3)

Balance represents proceeds to be received from inventory sold at auction in the closing of the Passaic property. We expect to receive the proceeds from these sales during the second quarter of fiscal 2020. The balance is reported within Prepaid expenses and other current assets as of September 30, 2019.

(4)

The previously recorded vacant space liability was reclassified from Accounts payable and accrued expenses and Other long-term liabilitiesto Operating lease right-of-use assets upon the adoption of ASU 2016-02, which requires all right-of-use assets to be measured net of any Topic 420 lease liabilities.

(5)	The remaining balance from the other charges (income) as of September 30, 2019 is recorded within Accounts payable and accrued expenses.

(10)	Share-Based Compensation

During the three months ended September 30, 2019 and 2018, we recognized total share-based compensation expense of $0.2 million and $0.5 million, respectively. These amounts have been included in the consolidated statements of comprehensive income within selling, general and administrative expenses. As of September 30, 2019, $1.8 million of total unrecognized compensation expense related to non-vested equity awards is expected to be recognized over a weighted average period of 2.3 years. There was no share-based compensation capitalized for the three months ended September 30, 2019 or 2018.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

At September 30, 2019, there were 1,470,810 shares of common stock available for future issuance pursuant to the Ethan Allen Interiors Inc. Stock Incentive Plan. Stock options are 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. Grants to independent directors have a three-year service vesting condition.

A summary of stock option activity during the three months ended September 30, 2019 is presented below.

				Weighted
				Average
	Options			Exercise Price
Outstanding at June 30, 2019		378,911		$	21.95
Granted		34,188		$	17.55
Exercised		(1,500	)	$	11.74
Canceled (forfeited/expired)		(17,497	)	$	25.61
Outstanding at September 30, 2019		394,102		$	21.45
Exercisable at September 30, 2019		322,483		$	21.36

There were no stock option awards granted to employees during each of the periods presented. Non-employee (independent) directors were granted stock options during the first quarter of each fiscal year presented and valued using the Black-Scholes option pricing model with the following assumptions.

	Q1 2020			Q1 2019
Volatility		30.8	%		31.3	%
Risk-free rate of return		1.55	%		2.80	%
Dividend yield		3.97	%		3.24	%
Expected average life (years)		5.3			5.0

A summary of stock unit awards activity during the three months ended September 30, 2019 is presented below.

	Units		Grant Date Fair Value
Outstanding at June 30, 2019		313,882	$	22.82
Granted		99,405	$	12.72
Vested		-	$	-
Canceled (forfeited/expired)		-	$	-
Outstanding at September 30, 2019		413,287	$	20.37

We estimate, as of the date of grant, the fair value of performance stock 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 a Monte-Carlo simulation. The weighted average assumptions used for the stock units granted during the first quarter of fiscal 2020 and 2019, respectively, is presented below.

	Q1 2020			Q1 2019
Volatility		30.5	%		32.1	%
Risk-free rate of return		1.72	%		2.72	%
Dividend yield		3.97	%		3.24	%
Expected average life (years)		3.0			3.0

There was no restricted stock award activity during fiscal 2020. As of September 30, 2019, there were no restricted stock awards outstanding.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

(11)	Earnings Per Share

Basic and diluted earnings per share (“EPS”) are calculated using the following weighted average share data (in thousands):

	Three months ended				Nine months ended				Three months ended
	March 31,				March 31,				September 30,
	2019		2018		2019		2018		2019		2018
Weighted average shares outstanding for basic calculation		26,705		27,476		26,690		27,469		26,713		26,539
Dilutive effect of stock options and other share-based awards		46		216		59		256		37		401
Weighted average shares outstanding adjusted for dilution calculation		26,751		27,692		26,749		27,725		26,750		26,940

Dilutive potential common shares consist of stock options and ~~unvested restricted~~performance stock ~~awards.~~ units.

As of ~~March 31,~~September 30, 2019 and 2018, stock options to purchase ~~260,571~~232,914 and ~~197,411~~157,294 common shares, respectively, were excluded from the diluted EPS calculations because their inclusion would have been anti-dilutive.

As of ~~March 31,~~September 30, 2019 and 2018, the number of performance-based equity award grants excluded from the calculation of diluted EPS was ~~269,138~~287,287 and ~~233,596,~~288,815, respectively. Performance-based awards are excluded from the calculation of diluted EPS unless the performance criteria are probable of being achieved as of the balance sheet date.

~~(11)~~(12)

Accumulated Other Comprehensive Income ~~(Loss)~~(Loss)

Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations outside the U.S. Assets and liabilities are translated into U.S. dollars using the current period-end exchange rate and income and expense amounts are translated using the average exchange rate for the period in ~~Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that~~which the ~~earnings of non-U.S. subsidiaries are deemed to be permanently reinvested.~~transaction occurred. The following table sets forth the activity in accumulated other comprehensive loss for the fiscal year-to-date period ended ~~March 31,~~September 30, 2019 (in thousands).

Balance June 30, 2018
$ (6,171 )
Changes before reclassifications
355
Amounts reclassified from accumulated other comprehensive income
-
Current period other comprehensive income (loss)
355
Balance March 31, 2019
$ (5,816 )

	Three months ended
	September 30,
	2019			2018
Beginning balance at July 1	$	(5,651	)	$	(6,171	)
Foreign currency translation adjustments		(499	)		1,247
Amounts reclassified from accumulated other comprehensive income		-			-
Current period other comprehensive income (loss)		(499	)		1,247
Ending balance at September 30	$	(6,150	)	$	(4,924	)

~~(12)~~(13)

Segment Information

Our operating segments are aligned with how the Company, including its chief operating decision maker, manages the business. As such, our reportable operating segments are the Wholesale segment and the Retail segment. 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 ~~net sales~~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 ~~March 31,~~September 30, 2019, the Company operated ~~142~~145 design centers (our retail segment) and our independent retailers operated ~~161~~156 design centers. Our wholesale segment net sales include sales to our retail segment, which are eliminated in consolidation, and sales to our independent ~~retailers and unaffiliated third parties.~~retailers. Our retail segment net sales accounted for 79% of our consolidated net sales in the ~~nine~~three months ended ~~March 31,~~September 30, 2019. Our wholesale segment net sales accounted for the remaining 21%.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Segment information for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2019 and 2018 is provided below (in thousands):

Three months ended

Nine months ended

March 31,

March 31,

2019

2018

2019

2018

Net Sales:

Wholesale segment
$ 108,367 $ 118,921 $ 334,097 $ 348,473
Retail segment
138,947 136,903 442,669 431,469
Elimination of intercompany sales
(69,485 ) (74,405 ) (214,000 ) (218,740 )
Consolidated Total
$ 177,829 $ 181,419 $ 562,766 $ 561,202

Operating income:

Wholesale segment
$ 13,045 $ 7,927 $ 36,181 $ 36,957
Retail segment
(1,669 ) (2,896 ) 83 (6,304 )
Elimination of intercompany profit (a)
(707 ) (1,158 ) 2,332 2,307
Consolidated Total
$ 10,669 $ 3,873 $ 38,596 $ 32,960

Depreciation and Amortization:

Wholesale segment
$ 1,914 $ 2,002 $ 5,771 $ 5,827
Retail segment
3,010 2,913 9,078 9,128
Consolidated Total
$ 4,924 $ 4,915 $ 14,849 $ 14,955

Capital expenditures:

Wholesale segment
$ 726 $ 1,561 $ 2,407 $ 3,076
Retail segment
1,310 2,579 4,583 6,045
Consolidated Total
$ 2,036 $ 4,140 $ 6,990 $ 9,121

	March 31,			June 30,			Three months ended
	2019			2018			September 30,
Total Assets:
							2019			2018
Net sales
Wholesale segment	$	247,343		$	241,616		$	101,329		$	118,072
Retail segment		311,132			317,590			137,266			145,214
Inventory profit elimination (b)		(25,643	)		(28,773	)
Elimination of intercompany sales								(64,674	)		(75,501	)
Consolidated Total	$	532,832		$	530,433		$	173,921		$	187,785

Income before income taxes
Wholesale segment							$	16,928		$	14,315
Retail segment								1,564			(1,559	)
Elimination of intercompany profit (a)								149			(957	)
Operating income								18,641			11,799
Interest income, net of interest (expense)								19			(27	)
Consolidated Total							$	18,660		$	11,772

Depreciation and amortization
Wholesale segment							$	1,890		$	1,961
Retail segment								2,086			3,039
Consolidated Total							$	3,976		$	5,000

Capital expenditures
Wholesale segment							$	1,163		$	850
Retail segment								2,251			1,927
Consolidated Total							$	3,414		$	2,777

(a)

Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.

	September 30,			June 30,
	2019			2019
Total Assets:
Wholesale segment	$	249,539		$	237,354
Retail segment		430,563			299,125
Inventory profit elimination (b)		(26,203	)		(26,128	)
Consolidated Total	$	653,899		$	510,351

(b)

Represents 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.

~~(13)~~(14)

Commitments and Contingencies

We accrue non-income tax liabilities for contingencies when management believes that a loss is probable, and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. We are routinely party to various legal proceedings, claims and litigation that have arisen in the ordinary course of business, including employment matters, commercial and intellectual property disputes and environmental items. For more information on how we determine whether to accrue for potential losses resulting from litigation, see Note 1320 to our consolidated financial statements included in our ~~2018~~2019 Annual Report on Form 10-K. Environmental items typically involve investigations and proceedings concerning air emissions, hazardous waste discharges, and/or management of solid and hazardous wastes. Under applicable environmental laws and regulations, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment due to the disposal or release of certain hazardous materials. We believe that our facilities are in material compliance with all such applicable laws and regulations.

The outcome of all the matters against us is subject to future resolution, including the uncertainties of litigation. Based on information available at ~~March 31,~~September 30, 2019, management believes that the ultimate outcome of these unresolved matters against the Company, individually or in the aggregate, will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~(14)~~

~~Subsequent Event~~s

~~We have evaluated subsequent events through the date that the consolidated financial statements were issued.~~

~~Optimization of Manufacturing and Logistics~~

~~On April 17, 2019, the Company issued a press release announcing plans to further improve its vertical integration operations with the following initiatives:~~

~~Our Old Fort, North Carolina plant will be converted into a state-of-the-art distribution center to support our national distribution structure.~~

Consolidating approximately half of the case goods manufacturing at our Old Fort plant into our case goods plants in Orleans and Beecher Falls, Vermont, with the balance to be consolidated into our other manufacturing facilities.

~~Expand our Maiden, North Carolina campus with the addition of 80,000 square feet of operating space.~~

~~Distribution operations at our Passaic, New Jersey facility will be discontinued and subsequently moved to our operations in North Carolina and the art framing operations will be outsourced.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in the following sections:

	-	Forward-Looking Statements
	-	Executive Overview
	-	Key Operating Metrics
	-	Results of Operations
	-	Reconciliation of Non-GAAP Financial Measures
	-	Liquidity
	-	Capital Resources
	-	Share Repurchase Program
	-	Contractual Obligations
	-	Dividends
	-	Off-Balance Sheet Arrangements and Other Commitments and Contingencies
	-	Foreign Currency
	-	Significant Accounting Policies and Critical Accounting Estimates
	-	Recent Accounting Pronouncements
	-	Business Outlook

The following MD&A should be read in conjunction with our ~~2018~~2019 Annual Report on Form 10-K, Current Reports on Form 8-K and other filings with the Securities and Exchange Commission (the “SEC”), and the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including this MD&A, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors found in 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”). All statements other than statements of historical facts are statements that could be deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industry in which we operate and the beliefs and assumptions of our management. Words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “will,” “may,” “continue,” “project,” ”target,” “outlook,” “forecast,” “guidance,” variations of such words, and similar expressions and the negatives of such forward-looking words are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, and other characterizations of future events or circumstances are forward-looking statements. 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 risk factors and uncertainties including, but not limited ~~to:~~to the following: a volatile retail environment and changing economic conditions may further adversely affect consumer demand and spending; global and local economic uncertainty may materially adversely affect our manufacturing operations or sources of merchandise and international operations; disruptions of our supply chain; changes in United States trade and tax policy; competition from overseas manufacturers and domestic retailers; ~~our anticipating~~failure to successfully anticipate or ~~responding~~respond 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,~~brand; our manufacturing operations or sources of merchandise and international operations; changes in U.S. policy related to imported merchandise; an economic downturn; potentially negative or unexpected tax consequences of changes to fiscal and tax policies; our limited number of manufacturing and logistics ~~sites;~~sites may increase our exposure to business disruptions and could result in higher transportation costs; fluctuations in the price, availability and quality of raw ~~materials; environmental,~~materials could result in increased costs or cause production delays; our current and former manufacturing and retail operations and products are subject to increasingly stringent environment, health and safety requirements; the use of emerging technologies as well as unanticipated changes in the pricing and other practices of competitors; reliance on information technology systems to process transactions, summarize results, and manage our business and that of certain independent retailers; disruptions in both our primary and back-up systems; product recalls or product safety concerns; ~~disruptions to our technology infrastructure (including cyber-attacks); increasing labor costs, competitive labor markets~~successful cyber-attacks and ~~our continued~~the ability to ~~retain high-quality personnel~~maintain adequate cyber-security systems and ~~risks~~procedures; loss, corruption and misappropriation of ~~work stoppages;~~data and information relating to customers; 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;~~ additional asset impairment charges that could reduce our profitability; access to consumer credit could be interrupted as a result of conditions outside of our control; 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 results of~~changes to fiscal and tax policies; our operations ~~for any quarter are~~present hazards and risks which may not ~~necessarily indicative of our results of operations for a full year;~~be fully covered by insurance; possible failure to protect our intellectual property; and other factors described under Part I, Item 1A. Risk Factors in our ~~2018~~2019 Annual Report on Form 10-K, and elsewhere herein.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

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 Quarterly Report on Form 10-Q. 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.

Executive Overview

We are a leading interior design company and manufacturer and retailer of quality home furnishings. Founded over 8587 years ago, today we are a leading international home fashion brand doing business in North America, Europe, Asia and the Middle East. We are vertically integrated from design through delivery, affording our clientele a value proposition of style, quality and price. We offer complementary interior design service to our clients and sell a full range of furniture products and decorative accents through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail segment. We own and operate nine manufacturing facilities, including six manufacturing plants ~~and one sawmill~~ in the United States plus two plants in Mexico and one ~~manufacturing plant~~ in ~~each of Mexico and~~ Honduras.

Our business model is to maintain continued focus on (i) ~~communicating our messages with strong advertising and marketing campaigns, (ii)~~ capitalizing on the strength of our interior design professionals and management in our retail design centers, (ii) communicating our messages with effective advertising and marketing campaigns, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to ~~a network of approximately 200 North American~~our design centers, ~~located near our demographic base,~~ (iv) investing in new technologies across key aspects of our vertically integrated business, and (v) leveraging the benefits of our vertical integration by maintaining ~~our~~ manufacturing capacity in North America where we manufacture approximately 75% of our products.

Our competitive advantages arise from:

-●

providing fashionable high-quality products of the finest craftsmanship;

-●

offering complimentary design service through ~~an estimated~~approximately 2,000 motivated interior design professionals network-wide;

-●

offering a wide array of custom products across our upholstery, case goods, and accent product categories;

-●

enhancing our technology in all aspects of the business; and

-●

leveraging our vertically integrated structure.

We have completed a major transformation of our product offerings, having refreshed over 70% of our entire product line over the past three years. In the past 12 months, we further strengthened our offerings with new products featuring a modern perspective on classic designs. Our contract sales, including sales to GSA, hospitality and commercial businesses, continue to grow and GSA has become one of our ten largest customers. Our internet sales, while still a low percentage of our consolidated sales, are growing at a rate that continues to out-pace our brick and mortar design centers.

We measure the performance of our ~~design centers~~wholesale and retail segments based on total net sales ~~and written~~on a comparable period basis. We also measure wholesale orders booked on a comparable period basis. ~~Comparable design centers are those which have been operating for at least 15 months,~~Wholesale orders booked reflect new orders placed with our wholesale segment from all sales channels, 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 fromour retail segment, independent retailers ~~are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations.~~and contract customers. The frequency and timing 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. ~~Our international net sales are composed of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated international design centers.~~

Fiscal ~~2019 Third~~2020First Quarter in Review– - ~~Improved gross margin, cost containment~~We continued strengthening our product and marketing programs during the first three months of fiscal 2020 and believe we are well positioned for future growth. In September 2019, we completed the sale of our Passaic, New Jersey facility, to an independent third party, and received $12.4 million in cash less certain adjustments, including $0.9 million in selling and other closing costs. The resulting net gain of $11.5 million from this sale is reported within our ~~expenses~~wholesale segment operating results. This transaction, together with our cash provided by operating activities, increased our cash on hand at the end of the quarter by 120% to $45.9 million. While our wholesale orders from China declined 37.6% mainly due to the imposition of tariffs by China, our contract business, driven by the GSA contract, had a strong quarter with orders growing by 62.4%. Total wholesale orders excluding our China business increased 0.7%, and ~~a lower effective tax rate~~including the impact of decreased China orders, our total wholesale orders decreased 1.5% in the first quarter of fiscal 2020 compared with the same quarter last fiscal year.

Adjusted gross and operating margin expansion helped increase our adjusted diluted earnings per share in ~~the three months ended March 31, 2019~~fiscal 2020 to ~~$0.30,~~$0.35, up 6.1% from ~~$0.09~~$0.33 in the year ago ~~third~~first quarter. ~~An increase of 1.5% for retail~~Consolidated net sales ~~was partly offset by a decrease of 8.9% for wholesale net sales. Consolidated international net sales for the three months ended March 31, 2019~~ decreased ~~30.2%~~7.4% primarily due to lower sales into China and ~~made up 6.6% of our consolidated~~a 5.5% decrease in retail net sales compared with 9.3% in the prior year period. Gross profit grew by $1.7 million or 1.7% in the current year third quarter compared with the same period a year ago, driven by a 200-basis point expansion in our gross margin.sales. For the three months ended ~~March 31,~~September 30, 2019, adjusted gross margin was ~~55.3%~~56.3%, up from ~~53.3%~~54.0% a year ago, due to improved retail and wholesale gross margin coupled with a change in the retail sales mix relative to total sales, which was ~~78.1%~~78.9% compared with ~~75.5%~~77.3% in the comparable prior year period. ~~Operating~~Adjusted operating expenses, ~~in the three months ended March 31, 2019 decreased by $5.1 million, or 5.5%, representing 49.3%~~ as aexpressed as percentage of sales, increased to 49.3% compared with ~~51.2%~~47.7% a year ~~ago. The primary driver of lower~~ago primarily due to net sales decreasing 7.4% while adjusted operating expenses ~~was a reduction in national television advertising costs partially offset by higher retail occupancy and selling expenses.~~declined 4.4%. The effective income tax rate was ~~24.8%~~24.4% in the current quarter compared with ~~31.2% in the prior year due to tax law changes resulting from the Tax Act.~~24.9%.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Key Operating Metrics

A summary of our key operating metrics is presented in the following table ($ in millions, except per share amounts).

	Three months ended March 31,										Nine months ended March 31,										Three months ended September 30,
	2019		% of Sales			2018		% of Sales			2019		% of Sales			2018		% of Sales			2019		% of Sales			2018		% of Sales
Net sales	$	177.8				$	181.4				$	562.8				$	561.2				$	173.9				$	187.8
Gross profit	$	98.4		55.3	%	$	96.7		53.3	%	$	308.7		54.9	%	$	304.8		54.3	%	$	93.8		53.9	%	$	101.5		54.0	%
Adjusted gross profit⁽¹⁾																					$	97.9		56.3	%	$	101.5		54.0	%
Operating income	$	10.7		6.0	%	$	3.9		2.1	%	$	38.6		6.9	%	$	33.0		5.9	%	$	18.6		10.7	%	$	11.8		6.3	%
Adjusted operating income⁽¹⁾																					$	12.2		7.0	%	$	11.8		6.3	%
Net income	$	8.0		4.5	%	$	2.6		1.4	%	$	29.0		5.2	%	$	24.9		4.4	%	$	14.1		8.1	%	$	8.8		4.7	%
Adjusted net income⁽¹⁾																					$	9.3		5.3	%	$	8.8		4.7	%
Diluted EPS	$	0.30				$	0.09				$	1.08				$	0.90				$	0.53				$	0.33
Net cash provided by operating activities	$	12.8				$	20.9				$	44.3				$	35.1
Capital expenditures	$	2.0				$	4.1				$	7.0				$	9.1
Adjusted diluted EPS⁽¹⁾																					$	0.35				$	0.33
Cash flow from operating activities																					$	23.4				$	24.4

(1)	Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

A summary of changes from the applicable periods in the preceding fiscal year is presented in the following table.

	Three months ended						Nine months ended						Three months ended
	March 31,						March 31,						September 30,
	2019			2018			2019			2018			2019			2018
Net sales		(2.0	%)		0.5	%		0.3	%		(1.3	%)		(7.4	%)		3.6	%
Gross profit		1.7	%		2.4	%		1.3	%		(1.3	%)		(7.5	%)		1.1	%
Adjusted gross profit⁽¹⁾														(3.5	%)		1.1	%
Operating income		175.5	%		(1.2	%)		17.1	%		(16.2	%)		58.0	%		2.2	%
Adjusted operating income⁽¹⁾														3.5	%		(4.8	%)
Net income		205.0	%		14.6	%		16.5	%		1.6	%		59.6	%		19.2	%
Adjusted net income⁽¹⁾														4.7	%		12.9	%
Diluted EPS		233.3	%		12.5	%		20.0	%		2.3	%		60.6	%		22.2	%
Net cash provided by operating activities		(38.7	%)		(20.4	%)		26.3	%		(34.7	%)
Capital expenditures		(50.8	%)		7.3	%		(23.4	%)		(39.6	%)
Adjusted diluted EPS⁽¹⁾														6.1	%		17.9	%
Cash flow from operating activities														(4.3	%)		38.6	%

(1)	Refer to the Reconciliation of Non-GAAP Financial Measures section within this MD&A for the reconciliation of U.S. GAAP to adjusted key financial metrics.

The components of consolidated net sales and operating income by business segment is presented in the following table ($ in millions).

	Three months ended March 31,						Nine months ended March 31,						Three months ended September 30,
	2019			2018			2019			2018			2019			2018			% Chg
Net Sales:
Net Sales
Wholesale segment	$	108.4		$	118.9		$	334.1		$	348.5		$	101.3		$	118.1			(14.2	%)
Retail segment		138.9			136.9			442.7			431.5			137.3			145.2			(5.5	%)
Elimination of intersegment sales		(69.5	)		(74.4	)		(214.0	)		(218.8	)		(64.7	)		(75.5	)
Consolidated net sales	$	177.8		$	181.4		$	562.8		$	561.2		$	173.9		$	187.8			(7.4	%)

Operating income (loss):
Operating income
Wholesale segment	$	13.1		$	7.9		$	36.2		$	37.0		$	16.9		$	14.3			18.3	%
Retail segment		(1.7	)		(2.9	)		0.1			(6.3	)		1.6			(1.6	)		200.3	%
Elimination of intercompany profit (a)		(0.7	)		(1.1	)		2.3			2.3			0.1			(0.9	)
Consolidated operating income	$	10.7		$	3.9		$	38.6		$	33.0		$	18.6		$	11.8			58.0	%

(a)

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 changes from the applicable periods in the preceding fiscal year is presented in the following table.~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Three months ended
March 31,

Nine months ended
March 31,

2019

2018

2019

2018

Wholesale segment:

Net Sales
(8.9 %) 7.3 % (4.1 %) 2.8 %
Operating Income
64.6 % (18.5 %) (2.1 %) (8.5 %)
Backlog
(22.1 %) 69.7 % (22.1 %) 69.7 %

Retail segment:

Net Sales
1.5 % (3.6 %) 2.6 % (4.2 %)
Comparable design center revenue
0.5 % (4.2 %) 1.4 % (5.1 %)
Total written orders
1.4 % 2.6 % (0.6 %) (0.4 %)
Comparable design center written orders
0.4 % 1.6 % (1.9 %) (1.3 %)
Operating Income
42.4 % 60.4 % 101.3 % (51.9 %)
Backlog
(11.9 %) 13.6 % (11.9 %) 13.6 %

The following table shows selected design center location information.

Fiscal 2019

Fiscal 2018

Independent

Company-

Independent

Company-

retailers

operated

Total

retailers

operated

Total

Retail Design Center location activity:

Balance at July 1
148 148 296 155 148 303
New locations
17 1 18 11 2 13
Closures
(3 ) (8 ) (11 ) (6 ) (3 ) (9 )
Transfers
(1 ) 1 - - - -
Balance at March 31
161 142 303 160 147 307
Relocations (in new and closures)
- 1 1 - - -

Retail Design Center geographic locations:

United States
41 136 177 47 141 188
Canada
- 6 6 - 6 6
China
102 - 102 88 - 88
Other Asia
11 - 11 12 - 12
Europe
1 - 1 6 - 6
Middle East
6 - 6 7 - 7
Total
161 142 303 160 147 307

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

	Fiscal 2020									Fiscal 2019
	Independent			Company-						Independent			Company-
	retailers			operated			Total			retailers			operated			Total
Retail Design Center location activity:
Balance at July 1		158			144			302			148			148			296
New locations		3			4			7			6			-			6
Closures		(4	)		(4	)		(8	)		(1	)		(1	)		(2	)
Transfers		(1	)		1			-			-			-			-
Balance at September 30		156			145			301			153			147			300
Relocations (in new and closures)		-			3			3			-			-			-

Retail Design Center geographic locations:
United States		38			139			177			43			141			184
Canada		-			6			6			-			6			6
China		100			-			100			92			-			92
Other Asia		11			-			11			10			-			10
Europe		1			-			1			1			-			1
Middle East		6			-			6			7			-			7
Total		156			145			301			153			147			300

Results of Operations

For an understanding of the significant factors that influenced our performance for the three ~~and nine~~ months ended ~~March 31,~~September 30, 2019 and 2018, respectively, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented in this Quarterly Report on Form 10-Q ($ in millions, except per share amounts). Unless otherwise noted, all comparisons in the following discussion are from the ~~three- or nine-month~~three-month period ended ~~March 31,~~September 30, 2019 to the comparable prior fiscal year ~~three- or nine-month~~three-month period.

~~Third~~First Quarter eended ~~nded~~ September 30~~March 31,~~, 2019 compared with ~~Third~~First Quarter eended ~~nded~~ September 30~~March 31,~~, 2018

Consolidated net sales ~~for the quarter~~were $173.9 million, a decrease of ~~$177.8~~7.4% or $13.9 million compared ~~with $181.4 million for~~to the same prior year ~~period, a decrease of 2.0%. Sales~~period. Net sales decreased by ~~8.9%~~14.2% for our wholesale segment ~~which were partly offset~~and by ~~a 1.5% increase~~5.5% in our retail segment. There was a ~~30.2%~~$4.7 million decrease in international sales infrom our combined retail and wholesale segments, which ~~we believe is~~was primarily related to lower sales in China and Canada due to the economic uncertainty surrounding ~~current~~ international trade ~~disputes.~~

~~Retail net~~disputes and a challenging global economy. Net sales ~~for~~ to China were 49.4% lower in the first quarter of ~~$138.9 million~~fiscal 2020 compared with ~~$136.9 million for~~ the ~~prior year period, an increase of 1.5%. Comparative retail net sales increased 0.5%. There were 142 Company-operated design centers during the~~same quarter down from 147 in the prior year period. There was a 1.9% increase in sales in the U.S., while sales from the Canadian design centers decreased 9.6%. Total written business (new orders booked) increased 1.4%, with an increase in the U.S. and a decrease in Canada. Comparable design center written business in the quarter increased 0.4% in total.last fiscal year.

Wholesale net sales ~~for the quarter of $108.4 million compared with $118.9 million for the prior year period, a decrease of 8.9%.~~decreased 14.2% to $101.3 million. The lower net sales were primarily due to a ~~reduction~~decline in sales to China and to our North American retail network. Partially offsetting these declines was growth in contract sales, which grew $4.5 million year over year. The ~~prior~~ year ~~quarter~~over year increase in contract sales was primarily attributable to higher sales from the GSA contract. Our international net sales ~~benefitted from delayed shipments~~to independent retailers was 3.4% of our consolidated net sales compared to 5.3%.

Wholesale orders booked, which represents orders booked through all of our channels, during the first ~~half that had begun shipping during~~quarter of fiscal 2020 was down 1.5% compared with the ~~quarter. Contract~~same quarter last fiscal year. Wholesale orders from China declined 37.6% from a year ago mainly due to the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. Excluding orders from China, our total wholesale orders increased 0.7%, which was driven by continued growth in our contract business, including the GSA contract. We believe our new format of reporting on wholesale orders booked through all channels provides a more holistic view of our business than our previous reporting approach focusing on the change in only the company retail division written orders.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Retail net sales ~~increased for~~ from Ethan Allen operated design centers decreased by $7.9 million, or 5.5%, to $137.3 million. There was a 5.3% decrease in net sales in the ~~current~~United States, while net sales from the Canadian design centers decreased 10.8%. These decreases were primarily due to softer order trends as consumers have been cautious with discretionary spending. There were 145 Company operated design centers at the end of the first quarter of fiscal 2020, two less than the 147 in the prior year ~~quarter while international sales, especially to China, decreased.~~period.

Gross profit ~~for the quarter of $98.4~~decreased 7.5% to $93.8 million compared with ~~$96.7 million for~~ the prior year period ~~an increase of 1.7%, with an increase~~due to a decline in profit within our wholesale segment, while our retail segment ~~and a decrease in our wholesale segment. A price increase earlier~~grew slightly. Wholesale gross profit in fiscal ~~2019 improved gross profit, while~~2020 was negatively impacted by lower ~~wholesale~~ sales volume ~~negatively impacted gross profit. Gross margin for~~during the ~~quarter was 55.3% compared with 53.3%~~past three months, partially offset by a change in ~~the prior year period.~~product mix. Retail sales, as a ~~percent~~percentage of total consolidated sales, were ~~78.1% for the quarter~~78.9% in fiscal 2020 compared with ~~75.5%~~77.3% in the prior fiscal year, ~~quarter, increasing~~which favorably impacted our consolidated gross margin. Our fiscal 2020 adjusted gross margin improved to 56.3%, up from 54.0% in the prior year. Restructuring charges totaling $4.1 million, which included the write off of inventory, higher unfavorable manufacturing variances and incremental freight and relocation costs, negatively impacted our fiscal 2020 consolidated gross margin by 240 basis points.

Operating expenses ~~for the quarter of $87.7~~decreased to $75.2 million, or ~~49.3%~~43.2% of net sales, ~~decreased $5.1 million~~ compared with ~~$92.8~~$89.7 million, or ~~51.2%~~47.7% of net sales, for the prior year period. The ~~5.5%~~16.2% decrease was primarily due to a gain of $11.5 million from the sale of the Passaic property during the first quarter of fiscal 2020. The gain on the sale is reported within restructuring charges. In addition to the gain on the sale, operating expenses were lower ~~national television advertising costs of $6.4 million. The prior year quarter also reflected a reduction~~ in ~~expenses~~fiscal 2020 due to ~~the reversal~~lower retail depreciation expense and lower wholesale distribution costs from a lower volume of ~~$1.5 million in accrued incentive compensation.~~shipments.

Operating income ~~for the quarter of $10.7~~totaled $18.6 million, or ~~6.0%~~10.7% of net sales, compared with ~~$3.9~~$11.8 million, or ~~2.1%~~6.3% of net sales, for the prior year ~~period.~~first quarter. The ~~primary causes for the~~ increase in operating income was driven by the ~~benefit~~$11.5 million gain on the sale of the Passaic property and higher ~~gross profit and~~retail sales as a ~~reduction in national television advertising costs.~~

~~Retail~~percent of total consolidated sales partially offset by lower net sales. Adjusted operating ~~income~~ ~~for the quarter was a loss of $1.7 million compared with a loss of $2.9 million for the prior year period. The higher operating income and improved~~ margin in the ~~current~~first quarter of fiscal 2020 was ~~driven primarily~~7.0%, an increase of 70 bps compared to 6.3% last year. The 70-basis point increase in adjusted operating margin was from lower depreciation expense and a decrease in wholesale distribution costs partially offset by ~~the improved sales and gross margin in the current year period.~~lower net sales.

Wholesale operating income ~~for the quarter of $13.0~~increased 18.3% to $16.9 million compared with ~~$7.9~~$14.3 million for the prior year period. The increase was due to the $11.5 million gain on the sale of the Passaic property partially offset by $4.7 million in restructuring actions, including $4.1 million within cost of goods sold and $0.6 million within operating expenses during fiscal 2020. Adjusted wholesale operating income decreased 27.7% largely due to ~~higher~~lower sales volume.

Retail operating income was $1.6 million, or 1.1% of net sales in the first quarter of fiscal 2020 compared with a loss of $1.6 million for the prior year period. Growth in operating income was driven by an improvement in our gross margin rate and lower ~~advertising costs as discussed above.~~depreciation partially offset by lower sales. The main factor contributing to the overall gross margin increase stems from improved retail price and promotion optimization.

Income tax expense ~~for the quarter totaled $2.6~~was $4.6 million compared with ~~$1.2 million.~~$2.9 million a year ago. Our effective tax rate was ~~24.8%~~24.4% in the current year first quarter compared with ~~31.2%~~24.9%. The effective tax rate of ~~24.8%~~24.4% primarily includes a provision for income tax on the current quarter’s taxable income, including federal, state and local taxes, tax expense on the ~~establishment and~~ maintenance of a valuation allowance on Canadian deferred tax assets and tax and interest expense on uncertain tax ~~positions, partially offset by the reversal of various uncertain tax~~ positions. The ~~prior fiscal~~ year ago first quarter effective tax rate of 24.9% primarily includes tax expense on that quarter’s taxable income, ~~re-measurement~~tax expense on the cancelation of ~~deferred tax assets and liabilities as a result of the Tax Act,~~stock options and tax and interest expense on uncertain tax ~~positions, partially offset by the reversal of various uncertain tax~~ positions.

Net income ~~for the quarter of $8.0~~was $14.1 million compared with ~~$2.6~~$8.8 million for the prior year period, which resulted in ~~$0.30~~$0.53 per diluted share compared with ~~$0.09~~$0.33 in the prior year period. The gain on the sale of the Passaic property partially offset with other fiscal 2020 restructuring activities and corporate actions increased diluted EPS by $0.18. Adjusted diluted EPS of $0.35 in the current year first quarter represents 6.1% of growth over the prior year first quarter. This increase was driven by improved gross margin and cost containment.

Reconciliation of Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-GAAP financial measures including adjusted gross profit and margin, adjusted operating income, adjusted retail operating income and margin, adjusted wholesale operating income and margin, adjusted net income and adjusted diluted earnings per share. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are shown in tables below.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

~~Nine~~ ~~Months~~ ~~Ended~~ ~~March 31, 2019~~~~Compared~~These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with ~~Nine~~ ~~Months~~ ~~Ended~~ ~~March 31, 2018~~ U.S. GAAP. We believe these non-GAAP measures provide a meaningful comparison of our results to others in our industry and our prior year results. Investors should consider these non-GAAP financial measures in addition to, and not as a substitute for, our financial performance measures prepared in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with U.S. GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

~~Consolidated net sales~~ ~~year-to-date~~Despite the limitations of ~~$562.8 million compared with $561.2 million for~~these non-GAAP financial measures, we believe these adjusted financial measures and the information they provide are useful in viewing our performance using the same ~~prior year period, an increase~~tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

The following tables below show a reconciliation of ~~0.3%. Sales increased by 2.6%~~non-GAAP financial measures used in our retail segment, which were partially offset by a 4.1% decrease in our wholesale segment. There was a 28.1% decrease in international sales in our combined retail and wholesale segments, which we believe is relatedthis filing to the ~~economic uncertainty surrounding current international trade disputes.~~most directly comparable GAAP financial measures (in thousands, except per share data).

~~Retail net sales~~ year-to-date of $442.7 million compared with $431.5 million for the prior year period, an increase of 2.6%. Comparative retail net sales increased 1.4%. There were 142 Company-operated design centers during the period, down from 147 in the prior year period. There was a 3.6% increase in sales in the U.S., while sales from the Canadian design centers decreased 20.0%. Total written business (new orders booked) decreased 0.6%, with a decrease in both Canada and the U.S. Comparable design center written business year-to-date decreased 1.9% in total.

~~Wholesale net sales~~ year-to-date of $334.1 million compared with $348.5 million for the prior year period, a decrease of 4.1%. During the previous year, wholesale segment sales were at elevated levels as the shipping delays and the high backlogs from the first quarter were mostly caught up in the second quarter. This year the wholesale segment backlog levels returned to more normal levels. Lower international sales, especially to China, partially offset by increased contract sales, also contributed to the sales decrease.

~~Gross profit~~ year-to-date of $308.7 million compared with $304.8 million for the prior year period, up 1.3%, with an increase in our retail segment and a decrease in our wholesale segment. Consolidated gross margin year-to-date was 54.9% compared with 54.3%. A price increase earlier in fiscal 2019 improved gross profit, while lower wholesale sales volume negatively impacted gross profit. Retail sales as a percent of total consolidated sales was 78.7% year-to-date compared with 76.9% in the prior year period, increasing our consolidated gross margin.

~~Operating expenses~~ year-to-date of $270.1 million, or 48.0% of net sales, decreased $1.8 million compared with $271.9 million, or 48.4% of net sales, for the prior year period. The $1.8 million decrease from the prior year was primarily due to a $6.5 million reduction in national television advertising expenses partially offset by increased logistics (freight, distribution and warehouse) costs of $2.4 million.

~~Operating income~~ year-to-date of $38.6 million, or 6.9% of net sales, compared with $33.0 million, or 5.9% of net sales, for the prior year period. The primary causes for the 17.1% increase in operating income were increased domestic retail sales and lower national television advertising costs partially offset by reduced sales in wholesale and increased variable logistics costs.

~~Retail operating income~~ year-to-date of $0.1 million compared with a loss of $6.3 million for the prior year period. The improved operating income was driven primarily by the improved domestic sales in the current year period partially offset by lower international operating income.

~~Wholesale operating income~~ year-to-date of $36.2 million compared with $37.0 million for the prior year period. The decrease was largely due to lower third quarter net sales and increased distribution costs partially offset by a reduction in national television advertising expenses.

~~Income tax expense~~ year-to-date totaled $9.7 million compared with $8.0 million for the prior year period. Our effective tax rate was 25.0% in the period compared with 24.4%. The effective tax rate for the current fiscal year primarily includes tax expense on the fiscal year’s taxable income, including federal, state and local taxes, tax expense on the establishment and maintenance of a valuation allowance on Canadian deferred tax assets, and tax and interest expense on uncertain tax positions, partially offset by the reversal of various uncertain tax positions. The effective tax rate for the prior fiscal year primarily includes tax expense on that fiscal year’s taxable income, the tax benefit lost on the cancelation of stock options, and tax and interest expense on uncertain tax positions, partially offset by tax benefits from the re-measurement of deferred tax assets and liabilities as of result of the Tax Act, the vesting of restricted stock units, and the reversal of various uncertain tax positions.

~~Net income~~ year-to-date of $29.0 million compared with $24.9 million for the prior year period, an increase of 16.5%. This resulted in net income per diluted share year-to-date of $1.08 compared with $0.90, an increase of 20.0%.

	Three months ended September 30,
	2019			2018			% Change
Consolidated Adjusted Gross Profit / Gross Margin
GAAP Gross profit	$	93,794		$	101,450			(7.5	%)
Adjustments (pre-tax) *		4,140			-
Adjusted gross profit *	$	97,934		$	101,450			(3.5	%)
Adjusted gross margin *		56.3	%		54.0	%

Consolidated Adjusted Operating Income / Operating Margin
GAAP Operating income	$	18,641		$	11,799			58.0	%
Adjustments (pre-tax) *		(6,428	)		-
Adjusted operating income *	$	12,213		$	11,799			3.5	%

Net sales	$	173,921		$	187,785			(7.4	%)
GAAP Operating margin		10.7	%		6.3	%
Adjusted operating margin *		7.0	%		6.3	%

Consolidated Adjusted Net Income / Adjusted Diluted EPS
GAAP Net income	$	14,106		$	8,840			59.6	%
Adjustments, net of tax *		(4,853	)		-
Adjusted net income	$	9,253		$	8,840			4.7	%
Diluted weighted average common shares		26,750			26,940
GAAP Diluted EPS	$	0.53		$	0.33			60.6	%
Adjusted diluted EPS *	$	0.35		$	0.33			6.1	%

Wholesale Adjusted Operating Income / Adjusted Operating Margin
Wholesale GAAP operating income	$	16,928		$	14,315			18.3	%
Adjustments (pre-tax) *		(6,576	)		-
Adjusted wholesale operating income *	$	10,352		$	14,315			(27.7	%)

Wholesale net sales	$	101,329		$	118,072			(14.2	%)
Wholesale GAAP operating margin		16.7	%		12.1	%
Adjusted wholesale operating margin *		10.2	%		12.1	%

Retail Adjusted Operating Income / Adjusted Operating Margin
Retail GAAP operating income	$	1,564		$	(1,559	)		200.3	%
Adjustments (pre-tax) *		148			-
Adjusted retail operating income *	$	1,712		$	(1,559	)		209.8	%

Retail net sales	$	137,266		$	145,214			(5.5	%)
Retail GAAP operating margin		1.1	%		(1.1	%)
Adjusted retail operating margin *		1.2	%		(1.1	%)

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

* Adjustments to reported U.S. GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following (in thousands):

	Three months ended September 30,
	2019			2018
Inventory write-downs and manufacturing overhead costs	$	4,140		$	-
Adjustments to gross profit	$	4,140		$	-

Restructuring charges, including inventory write-downs (wholesale)	$	4,771		$	-
Gain on sale of Passaic, New Jersey property (wholesale)		(11,497	)		-
Other professional fees incurred (wholesale)		150			-
Retail acquisition costs and other restructuring charges (retail)		148			-
Adjustments to operating income	$	(6,428	)	$	-
Adjustments to income before income taxes	$	(6,428	)	$	-
Related income tax effects⁽¹⁾		1,575			-
Adjustments to net income	$	(4,853	)	$	-

(1)	Calculated using a rate of 24.4% in fiscal 2020 and 24.5% in fiscal 2019.

Liquidity

At ~~March 31,~~September 30, 2019, we held cash and cash equivalents of ~~$25.7~~$45.9 million compared with ~~$22.4~~$20.8 million at June 30, ~~2018.~~2019. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and amounts available under our credit facility. Cash and cash equivalents aggregated to 7.0% of our total assets at September 30, 2019, compared with 7.2% of our total assets a year ago and 4.1% at June 30, 2019. Our cash and cash equivalents increased $25.1 million during the ~~Facility.~~first quarter of fiscal 2020 due to net cash provided by operating activities of $23.4 million and proceeds from the sale of our Passaic property $11.6 million, partially offset by $5.1 million in dividend payments, $3.4 million of capital expenditures and $1.3 million from design center acquisitions.

A summary of net cash provided by (used in) operating, investing, and financing activities for the ~~nine~~three months ended ~~March 31,~~September 30, 2019 and 2018 is provided below (in millions):

	Nine months ended						Three months ended
	March 31,						September 30,
	2019			2018			2019			2018
Cash provided by (used in) operating activities
Net income plus other non-cash items	$	44.6		$	40.7		$	20.2		$	14.5
Restructuring payments								(4.1	)		-
Change in working capital		(0.3	)		(5.6	)		7.3			9.9
Total provided by operating activities	$	44.3		$	35.1		$	23.4		$	24.4

Cash provided by (used in) investing activities
Proceeds from sale of the Passaic property							$	11.6		$	-
Capital expenditures	$	(7.0	)	$	(9.1	)		(3.4	)		(2.8	)
Acquisitions, net of cash acquired								(1.3	)		-
Other investing activities		0.1			0.5			-			0.1
Total (used in) investing activities	$	(6.9	)	$	(8.6	)
Total provided by (used in) investing activities							$	6.9		$	(2.7	)

Cash provided by (used in) financing activities
Borrowings on revolving credit facility	$	16.0		$	-
Payments on borrowings and capital lease obligations		(8.4	)		(14.3	)
Payment of cash dividends		(41.9	)		(24.3	)	$	(5.1	)	$	(5.1	)
Repurchase of company stock		-			(1.1	)
Other financing activities		0.2			0.2			(0.1	)		0.5
Total (used in) financing activities	$	(34.1	)	$	(39.5	)	$	(5.2	)	$	(4.6	)

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Cash Provided by (Used in) Operating Activities -. Year-to-date cash ~~of $44.3 million was provided by~~generated from operating activities ~~an increase~~was $23.4 million, a decrease of ~~$9.2 million. This was largely~~$1.0 million primarily due to $4.1 million in restructuring payments made in connection with our previously announced optimization of manufacturing and logistics activities. Restructuring payments included $2.0 million in severance, $1.1 million of manufacturing overhead costs and $1.0 million of other exit and relocation costs. These payments were partially offset by higher net income and ~~an improvement in our working capital compared with last year as fiscal 2018 experienced a significant inventory increase to support the order backlog.~~non-cash items. Working capital ~~items consist~~was $7.3 million, down from $9.9 million a year ago primarily due to timing of ~~current assets (accounts receivable, inventories, prepaid and other current assets) less current liabilities (customer deposits, payables,~~accounts payable and accrued expenses partially offset by improved inventory management and ~~other current liabilities).~~higher retail customer deposits.

Cash Provided by (Used in) Investing Activities. -Year-to-date cash of $6.9 million ~~of cash~~ was ~~used in~~provided by investing activities ~~a decrease~~due to cash proceeds of ~~$1.7 million. Capital~~$11.6 million received from the sale of the Passaic property partially offset by capital expenditures ~~decreased $2.1~~of $3.4 million and $1.3 million from ~~the prior year and related primarily to retail~~ design center ~~improvements. We anticipate that cash~~acquisitions. In fiscal 2020, approximately 66% of our total capital expenditures related to opening new and relocating design centers in desirable locations, updating presentations and floor plans and the consolidation of certain design centers and service centers. Cash paid to acquire design centers from ~~operations will be sufficient to fund future capital expenditures. Effective July 1, 2018, and further described~~our independent retailers in ~~Note 3 to~~an arm’s length transaction totaled $1.3 million during the ~~consolidated financial statements included under Part I, Item 1~~first three months of ~~this Quarterly Report on Form 10-Q, the Company considers restricted cash as~~fiscal 2020 compared with none a component of cash and cash equivalents as presented on its consolidated statement of cash flows. Previously the net change in restricted cash was considered an investing activity. Prior periods have been reclassified to conform to current year ~~presentation.~~ago.

Cash Provided by (Used in) Financing Activities. - Year-to-date ~~$34.1~~$5.2 million was used in financing activities ~~which is $5.4 million less cash used than the $39.5~~compared with $4.6 million of cash used ~~during~~in the ~~first nine months of fiscal 2018.~~prior year comparable period. The ~~decrease~~increase year over year was ~~primarily~~ due to ~~a $13.2 million payment on the previously outstanding term loan in fiscal 2018, partially offset by a net borrowing on the Facility of $8.0~~$0.6 million in ~~the current year. During the current fiscal year to date period we paid dividends of $41.9 million compared with $24.3 million~~proceeds received from stock option exercises in the prior year ~~to date period. In November 2018,~~first quarter. During both periods presented we ~~declared a $1.00 per share special~~paid cash ~~dividend, which was paid in January 2019, in addition to the regular quarterly dividend~~dividends of $0.19 per share, ~~also paid in January 2019.~~totaling $5.1 million. We have continuously paid regular quarterly dividends for every quarter since 1996 and we expect to continue to do so as economic conditions and liquidity permit.

We believe that our cash flow from operations, together with our other available sources of liquidity including the ~~Facility,~~credit facility, will be adequate to make all required debt payments, to permit anticipated capital expenditures, and to fund working capital and other cash requirements. As of March 31, 2019, we had working capital of $97.7 million compared with $93.2 million at June 30, 2018, an increase of $4.5 million, or 4.8%. The Company had a current ratio of 1.77 to 1 at March 31, 2019 and 1.77 to 1 at June 30, 2018.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~In addition to using available cash~~sufficient 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. During the nine months ending March 31, 2019 and 2018 there were no share repurchases, respectively.~~other cash requirements.

Capital Resources

Capital Expenditures - Capital expenditures in the ~~third~~first quarter of fiscal ~~2019~~2020 were ~~$2.0~~$3.4 million, compared with ~~$4.1~~$2.8 million in the prior year period. Capital expenditures of ~~$1.3~~$2.3 million, or ~~64%~~66%, were primarily related to retail design center improvements. We have no material contractual commitments outstanding for future capital expenditures

Capital Needs - During December 2018 we entered into a five-year, $165 million senior secured revolving credit facility, which amended and restated the previously existing facility. To partially fund the special cash dividend paid to shareholders in January 2019, we borrowed $16.0 million from the Facility. By March 31, 2019, we had repaid $8.0 million of the total borrowed from cash generated from operating activities. For a detailed discussion of our debt obligations, ~~and timing of our related cash payments~~ see Note 8 to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.

Letters of Credit - At ~~both March 31,~~September 30, 2019 and June 30, ~~2018,~~2019, there was ~~$6.2~~$5.9 million and $6.1 million, respectively, of standby letters of credit outstanding under the ~~Facility.~~revolving credit facility.

Total availability under the Facility was ~~$150.8~~$148.4 million at ~~March 31,~~September 30, 2019 and ~~$108.8~~$158.9 million at June 30, ~~2018.~~2019. At both ~~March 31,~~September 30, 2019 and June 30, ~~2018,~~2019, we were in compliance with all the covenants under the ~~Facility.~~revolving credit facility.

Share Repurchase Program

We may from time to time make repurchases in the open market and privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. There were no share repurchases under the program during the first ~~nine~~three months of fiscal ~~2019.~~2020. At ~~March 31,~~September 30, 2019, we had a remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program.

Contractual Obligations

Fluctuations in our operating results, the degree of success of our accounts receivable collection efforts, the timing of tax and other payments, as well as necessary capital expenditures to support growth of our operations will impact our liquidity and cash flows in future periods. The effect of our contractual obligations on our liquidity and capital resources in future periods should be considered in conjunction with the factors mentioned here. As of June 30, ~~2018,~~2019, we had total contractual obligations of ~~$184.2~~$207.0 million, of which ~~$176.0~~$169.9 million related to our operating lease commitments. ~~With the exception~~Upon adoption of ~~the additional borrowings of $16.0 million under~~ASU 2016-02, we recognized these operating lease liabilities on our ~~renewed Facility, of which we had repaid $8.0 million by March 31, 2019, as described in the~~ ~~Capital Resources~~ – ~~Capital Needs~~ ~~section of this MD&A, there~~consolidated balance sheet. There were no ~~new~~other material changes in our contractual obligations during the first ~~nine~~three months of fiscal ~~2019.~~2020.

Dividends

~~In January 2019, we paid a $1.00 per share special cash dividend, in addition to the regular quarterly dividend of $0.19 per share.~~ On ~~January 28,~~July 25, 2019, our Board of Directors approved a regular quarterly dividend of ~~$0.19~~$0.21 per share. The $0.02 per share or 10.5% increase highlights our continued commitment to returning value to shareholders. The cash dividend of ~~$5.1~~$5.6 million was paid on ~~April~~October 25, 2019, to common stockholders of record at the close of business on ~~April 11,~~October 10, 2019. Future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us and is subject to final determination by our Board of Directors.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Off-Balance Sheet Arrangements and Other Commitments and Contingencies

~~Except as indicated below, we~~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 (other than as specified below), 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 March 31, 2019 and June 30, 2018 was for our consumer credit program as further described below.~~

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

~~Ethan Allen Consumer Credit Program~~Foreign Currency - 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, and the Company will utilize a substitute program upon 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 perform satisfactorily 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 us collateral at a variable rate based on the volume of program sales if we do not meet a covenant regarding minimum working capital or tangible net worth. At both March 31, 2019 and June 30, 2018, we were in compliance with such covenant.

~~Product Warranties~~ - ~~Our products, including~~Foreign currency exchange risk is primarily limited to our ~~case~~operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods ~~upholstery~~are denominated in U.S. dollars. The financial statements of these foreign locations are translated into U.S. dollars using period-end rates of exchange for assets and ~~home accents, generally carry explicit product warranties~~liabilities and average rates for the period for revenues and expenses. Translation gains and losses that ~~extend up to twelve years~~arise from translating assets, liabilities, revenues and expenses of foreign operations are ~~provided based on terms that are generally accepted~~recorded in accumulated other comprehensive (loss) income as a component of shareholders’ equity. Foreign exchange gains or losses resulting from market changes in the ~~industry. All our domestic independent retailers are required to enter into and perform in accordance with the terms and conditions~~value 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 occasions, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases,foreign currencies did not have a material ~~warranty issue may arise which is beyond~~impact during any of the scope of our historical experience. We provide for such warranty issues as they become known and are deemed 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. The Company’s product warranty liability totaled $1.4 million at March 31, 2019 compared with $1.5 million at June 30, 2018.periods presented in this Quarterly Report on Form 10-Q.

Significant Accounting Policies and Critical Accounting Estimates

We describe our significant accounting policies in Note 1,3, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements included in our ~~2018~~2019 Annual Report on Form 10-K. We discuss our critical accounting estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our ~~2018~~2019 Annual Report on Form 10-K.

We implemented ~~ASC 606~~ASU 2016-02 in the first quarter of fiscal ~~2019.~~2020. There have been no other changes in our significant accounting policies or critical accounting estimates during the first ~~nine~~three months of fiscal ~~2019~~2020 from those disclosed in our ~~2018~~2019 Annual Report on Form 10-K. Refer to Note 4,6, ~~Revenue Recognition~~Leases, for further details on the adoption of ~~ASC 606.~~ASU 2016-02.

Recent Accounting Pronouncements

See Note 3, Recent Accounting Pronouncements, to the consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements, including the expected dates of adoption.

Business Outlook

With our vertical enterprise well-positioned, we maintain a cautiously optimistic outlook. We continue to strengthen our talent across the Company. We believe our network of professionally-trained interior design professionals differentiate us from our competitors.

We are continuing our marketing focus on providing fresh and relevant product offerings, enhancing the projection of our design centers and deploying effective advertising across various mediums. We will also continue to leverage the use of technology combined with personal service within our retail network and online through ethanallen.com.

We continue to strengthen our vertically integrated structure from the concept of idea, to engineering, to manufacturing, to retail and logistics. We intend to maintain ~~strong~~our 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 and improving capacity, to ship stocked and custom made-to-order items more quickly, which in turn will allow us to grow our business. ~~Having refreshed over 70%~~

The Company also maintains its overall dedication to ethical and accountable business practices. Our corporate social responsibility commitments include the areas of environmental sustainability and community connections. We believe that these commitments create value for our ~~products in the last three years,~~stockholders and help position us to continuously improve business performance. Our strategy focuses our ~~current product offerings are fresh~~efforts on those areas most significant to our business, including health and ~~relevant.~~safety, environmental stewardship, community and stakeholder engagement, human rights and transparency. Our 2019 Corporate Responsibility Report is available at www.ethanallen.com/corporate-responsibility.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Our marketing programs continue to be strengthened with messaging focused on our stylish products, quality and service offerings. We expect to continue to maintain a targeted advertising program utilizing various advertising mediums during the remainder of fiscal 2019 as we broaden the reach of our messaging to drive more traffic to our design centers and to ethanallen.com.

Our network of professionally trained interior design professionals differentiate 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.

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~~25% 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 approximately 75% of our product offerings coupled with the import of other selected products, provides the greatest degree of flexibility, lower inventory levels, and short lead times and is the most effective approach to ensuring that acceptable levels of quality and service are maintained.

~~With our vertical enterprise well positioned,~~In October 2019 we ~~maintain~~introduced the Ethan Allen Member Program, an exclusive new membership program that reimagines and simplifies the shopping experience. For a ~~cautiously optimistic outlook. Our retail strategy will continue with its focus~~$100 annual fee, the Member Program provides members 20% everyday savings on ~~(i) providing relevant product offerings, a wide array of product solutions,~~all styles 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.free in-home delivery. Members who are Ethan Allen Platinum Card cardholders also receive special 24-month financing.

~~ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we are exposed to market risks relating to fluctuations in interest rates and foreign currency exchange rates that could impact our financial position and results of operations.

Interest Rate Risk

Interest rate risk exists primarily through our borrowing activities. We utilize ~~United States~~U.S. 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 ~~March 31,~~September 30, 2019, ~~the fair value of~~we did not have any floating-rate debt obligations outstanding under our ~~long-term debt was $8.0 million, which approximated its carrying amount and was determined based on quoted market prices for debt with a similar maturity.~~revolving credit facility. It is anticipated that the fair market value of ~~our~~any future debt under the credit facility will continue to be immaterially affected by fluctuations in interest rates and we do not believe that the value of ~~our~~such debt ~~has been~~would be significantly impacted by current market events. ~~The debt bears~~Previous borrowings under the facility during fiscal 2019 had an interest ~~on the outstanding principal amount at a~~ rate equal to the one-month LIBOR rate of 2.5% plus a spread using a debt leverage pricing grid currently at 1.5%. ~~During the nine months ended March 31, 2019, we recorded~~There was no interest expense from borrowings during the first three months of ~~$0.1 million on our~~fiscal 2020 as we had no outstanding ~~debt amounts.~~debt. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future. Assuming all terms of our outstanding long-term debt remained the same, a hypothetical 100 basis point change (up or down) in the one-month LIBOR rate would not have a material effect on our consolidated results of operations and financial condition.

~~For further~~LIBOR Transition

LIBOR is the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms and other pressure may cause LIBOR to disappear entirely or to perform differently than in the past. It is expected that certain banks will stop reporting information ~~regarding~~used to set LIBOR at the end of 2021 when their reporting obligations cease. This will effectively end the usefulness of LIBOR and may end its publication. The consequences of these developments cannot be entirely predicted but, as noted above, could impact the interest earned on our ~~other risk factors, see Item 7A –~~ ~~Quantitative~~investments and ~~Qualitative Disclosures About Market Risk~~our interest expense. If LIBOR is no longer widely available, or otherwise at our option, we will pursue alternative interest rate calculations in our ~~2018 Annual Report~~credit agreement. As of September 30, 2019, the Company had no outstanding borrowings under its existing credit facility and no material exposure to LIBOR, thus we do not believe the discontinuation of LIBOR will have a material impact on ~~Form 10-K.~~our financial position and results of operations.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Foreign Currency Exchange Risk

Foreign currency exchange risk is primarily limited to our operation of Ethan Allen operated retail design centers located in Canada and our manufacturing plants in Mexico and Honduras, as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, foreign exchange 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 hypothetical 10% weaker United States dollar against all foreign currencies at ~~March 31,~~September 30, 2019 would have had an immaterial impact on our consolidated results of operations and financial condition. We currently do not engage in any foreign currency hedging activity and we have no intention of doing so in the foreseeable future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer (principal executive officer) and the Executive Vice President Administration and Chief Financial Officer (principal financial officer), we have evaluated 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 Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the principal executive officer and principal financial officer have concluded that, as of ~~March 31,~~September 30, 2019, 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 with~~that we file or ~~submitted to~~submit under the ~~SEC~~Exchange Act is ~~(i)~~ recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and ~~(ii)~~is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

~~There~~Effective July 1, 2019, we adopted ASU 2016-02, Leases. Although the adoption of the new accounting standard did not have a material impact on our Consolidated Statement of Comprehensive Income or Consolidated Statement of Cash Flows for the three-months ended September 30, 2019, we did implement changes in our internal controls related to the implementation of the lease accounting standard. These changes include performing a comprehensive analysis to identify and assess each of our leases, developing ongoing processes and controls related to evaluating new and existing leases, and implementing a new lease accounting software system to calculate our right-of-use asset and lease liability values. Otherwise, there have been no other 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 ~~third fiscal~~first quarter ended ~~March 31,~~September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material changes during the first ~~nine~~three months of fiscal ~~2019~~2020 to the matters discussed in Part I, Item 3 - Legal Proceedings in our ~~2018~~2019 Annual Report on Form 10-K.

Item 1A. Risk Factors

There have been no material changes during the first ~~nine~~three months of fiscal ~~2019~~2020 to the risk factors identified in section Item IA – Risk Factors in our ~~2018~~2019 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Items 2(a) and (b) are not applicable as there have been no unregistered sales of equity securities.

~~The following table provides~~We may from time to time make repurchases in the open market and through privately negotiated transactions, subject to market conditions, including pursuant to our previously announced repurchase program. At September 30, 2019, we had a ~~month-to-month summary~~remaining Board authorization to repurchase 2,518,046 shares of our common stock pursuant to our program. There were no share repurchases under the ~~share repurchase activity~~program during the ~~three months~~quarter ended ~~March 31, 2019:~~

~~Period~~

~~Total number of~~

~~shares purchased~~

~~Average price~~

~~paid per share~~

~~Total number of shares purchased as part of~~

~~publicly announced~~

~~plans or programs~~

~~Maximum number of~~

~~shares (or approximate~~
~~dollar value) that may~~

~~yet be purchased under~~

~~the plans or programs~~

~~January 2019~~

~~2,518,046~~

~~February 2019~~

~~2,518,046~~

~~March 2019~~

~~2,518,046~~

~~Total~~

~~On April 24, 2018, our Board of Directors approved an increase to the share repurchase program authorizing us to repurchase up to approximately 3,000,000 shares.~~September 30, 2019. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined by our officers at their discretion, and as permitted by securities laws, covenants under existing bank agreements and other legal requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The share repurchase program may be suspended or discontinued at any time without prior notice.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Item 6. Exhibits

(a)

Exhibits

The following documents are filed as exhibits to this report:

Exhibit

Number

Exhibit Description

Incorporated by Reference

Filed

Herewith

F~~urnished~~

Furnished Herewith

Form

File

No.

Exhibit

Filing

Date

31.1

Certification of Principal Executive Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

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

32.2

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 Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

��

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements 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.

	ETHAN ALLEN INTERIORS INC.
	(Registrant)

Date: ~~April 29,~~November 4, 2019	BY: /s/ M. Farooq Kathwari
	M. Farooq Kathwari
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

Date: ~~April 29,~~November 4, 2019	BY: /s/ Corey Whitely
	Corey Whitely
	Executive Vice President, Administration Chief Financial Officer and Treasurer
	(Principal Financial Officer)

2831

Periods ending June 30,
2019 (remaining three months)	$	135
2020		550
2021		437
2022		60
2023		20
2024 and thereafter		8,000
Total scheduled debt payments	$	9,202

				Weighted
	Stock			Average
	Unit			Grant Date
	Awards			Fair Value
Outstanding at June 30, 2018		330,369		$	26.15
Granted		105,644			18.60
Vested		-			-
Canceled (forfeited/expired)		(33,227	)		23.36
Outstanding at March 31, 2019		402,786		$	24.40

Balance June 30, 2018	$	(6,171	)
Changes before reclassifications		355
Amounts reclassified from accumulated other comprehensive income		-
Current period other comprehensive income (loss)		355
Balance March 31, 2019	$	(5,816	)