ETHAN ALLEN INTERIORS INC (ETD) FY 2021 MD&A

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This 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.

The MD&A is based upon, and should be read in conjunction with, our Consolidated Financial Statements and related Notes included under Item 8 of this Annual Report on Form 10-K.

Executive Overview

Who We Are. Founded in 1932 and incorporated in Delaware in 1989, Ethan Allen is a leading interior design company, manufacturer and retailer in the home furnishings marketplace. We are a global luxury home fashion brand that is vertically integrated from product design through home delivery, which offers our customers stylish product offerings, artisanal quality and personalized service. We provide complimentary interior design service to our clients and sell a full range of home furnishing products through a retail network of approximately 300 design centers in the United States and abroad as well as online at ethanallen.com. Ethan Allen design centers represent a mix of locations operated by independent licensees and Company-operated locations. As of June 30, 2021, the Company operates 141 retail design centers; 136 located in the United States and five in Canada. Our 161 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 three manufacturing plants, one sawmill, one rough mill and a lumberyard in the United States and two manufacturing plants in Mexico and one manufacturing plant in Honduras. Approximately 75% of our products are made in our North American plants while we also partner with various suppliers located in Europe, Asia, and other various countries to produce products that support our business.

Business Model. Ethan Allen has a distinct vision of American style, rooted in the kind of substance that we believe differentiates us from our competitors. Our business model is to maintain continued focus on (i) capitalizing on the professional service offered to our customers by our interior design professionals in our retail design centers, (ii) investing in new technologies across key aspects of our vertically integrated business, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to our design centers, (iv) communicating our messages with strong advertising and marketing campaigns, and (v) leveraging the benefits of our vertical integration by maintaining a strong manufacturing capacity in North America.

Our competitive advantages arise from:

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Our strategy emphasizes the ability to position Ethan Allen as a preferred brand offering complimentary design service together with products of superior style, quality and value to provide customers with a comprehensive, one-stop shopping solution for their home furnishing and interior design needs. In carrying out our strategy, we continue to expand our reach to a broader consumer base through a diverse selection of attractively priced products, designed to complement one another, reflecting current fashion trends in home decorating. We continuously monitor changes in home fashion trends through industry events and fashion shows, internal market research, and regular communication with our retailers and design center design professionals who provide valuable input on consumer trends. We believe that the observations and input gathered enable us to incorporate appropriate style details into our products to react quickly to changing customer tastes.

Product Offering Introductions. Our product offerings continue to evolve and transform to meet the changing demands and tastes of our customers. We refreshed many of our product lines over the past several years. During fiscal 2021, we strengthened our bedding and mattresses offerings by introducing new products and styles. With an increased focus on the home, we also prioritized home office and making the customers home a haven. New offerings within home office, bedroom, living and dining room were launched. In addition, our outdoor product category offerings were enhanced during fiscal 2021. Prior to that, during fiscal 2020, we launched new products including Lucy, a mid-century modern inspired upholstery collection that launched very successfully, and Farmhouse, a country cottage inspired collection that has received strong reviews. In fiscal 2019, we introduced our Relaxed Modern product line, a casual, livable, inspired by nature, transitional design made of mixed materials as well as expanded our Outdoor collection.

Impact of COVID-19 on our Business. For a discussion of how COVID-19 has impacted and may continue to impact our business and financial condition, please refer to the discussion under the heading Impact of COVID-19 on our Business in Part I, Item 1 of this Annual Report on Form 10-K. In addition, refer to Item 1A. Risk Factors of this Annual Report on Form 10-K for further discussion of the potential impact of the COVID-19 pandemic on our business.

Fiscal 2021 Financial Year in Review. Despite many challenges due to the COVID-19 pandemic, our business performed well during fiscal 2021 as the increased consumer focus on the home created strong demand for our product offerings and interior design services. We recently passed the anniversary of the reopening of our design centers and manufacturing facilities and through the collective efforts of our associates, the Company was able to report strong results. Many of the changes we implemented a year ago, such as the previously announced manufacturing and optimization initiatives, certain reductions in employee headcount, increased use and leverage of technology, streamlined certain workflows and the elimination of non-essential spending, have allowed us to control expenses and improve our operating leverage. Our strong cash position provided us flexibility to pay down 100% of our outstanding debt as well as take advantage of opportunities and advance our strategic goals. Additionally, we strengthened our business by expanding production capacity, enhanced our use of technology and brought back many associates to further our talent. For the full fiscal 2021 year, we delivered consolidated net sales growth of 16.2%, operating margin of 11.3%, diluted earnings per share (“EPS”) of $2.37, cash from operations of $129.9 million, and returned $43.3 million to shareholders through cash dividends. Both our wholesale and retail segments experienced record demand, with written orders increasing 31.7% at wholesale and 47.7% at retail. Demand further accelerated during the fourth quarter of fiscal 2021, with retail written orders up 105.0% and wholesale written orders up 82.3%. This demand has led to record backlog as of June 30, 2021 as written orders outpaced net sales, which we expect to service and reduce during fiscal 2022. Our merchandising and supply-chain teams effectively managed raw material shortages, price increases, manufacturing delays and shipping container increases as we were able to achieve a gross profit margin of 57.4% for fiscal 2021 despite these challenges. As of June 30, 2021, our employee count was 4,188, up 24.3% in the past 12 months, as we ramped back up staffing to further strengthen our manufacturing and retail teams. Our Board reinstated our regular quarterly cash dividend in August 2020 and subsequently increased the regular quarterly cash dividend by 19% in November 2020. We also paid a special cash dividend of $0.75 per share in May 2021. Other notable events during fiscal 2021 included the opening of several new design centers including Oxnard, California; Towson, Maryland; Alpharetta, Georgia; and Portland, Oregon as well as holding our first-ever virtual celebration to congratulate associates for their exceptional interior design work.

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Optimization of Manufacturing and Logistics. Our vertical integration is a competitive advantage for us. Our North American manufacturing and logistics operations are an integral part of an overall strategy to maximize production efficiencies and maintain this competitive advantage. Over the past three years, we have executed on key initiatives to further optimize our manufacturing and logistics, including closing our Passaic, New Jersey property, converting our Old Fort, North Carolina case goods manufacturing operations into a national distribution center, expanding our existing Maiden, North Carolina manufacturing campus and most recently, closing our Atoka, Oklahoma distribution center and consolidating its workflow into our Old Fort, North Carolina facility. In connection with these initiatives, we recorded pre-tax restructuring and other exit charges totaling $0.4 million during fiscal 2021 compared with $2.1 million during fiscal 2020. The prior year charges consisted of $1.3 million in abnormal manufacturing variances associated with the Passaic and Old Fort facilities, $0.8 million in employee severance and other payroll and benefit costs and $0.7 million in other exit costs partially offset by $0.7 million in gains from the sale of property, plant and equipment held at our Old Fort facility. We also completed the sale of our Passaic property in September 2019 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. As a result of the sale, we recognized a pre-tax gain of $11.5 million in fiscal 2020.

Retail Segment Restructuring and Impairment Charges. During fiscal 2021 we recorded $2.5 million of restructuring and impairment charges within the retail segment. Of this total, approximately $0.6 million was a non-cash impairment charge for long-lived assets held at a retail design center, $1.5 million in remaining contractual obligations under leased space that was exited during fiscal 2021 and $0.8 million in severance and other charges. These charges were partially offset by the sale of two previously owned retail design centers, which together, resulted in a pre-tax gain of $0.5 million.

Inventory Write-downs. During fiscal 2021 we recorded a non-cash charge of $0.6 million related to the 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, $0.4 million related to slow moving finished goods with the remaining $0.2 million consisting of raw materials that were disposed.

CARES Act. In taking advantage of the stimulus measures under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), during fiscal 2020, we recorded employee retention credits of $1.2 million representing eligible wages paid to employees affected by the cessation of our operations. No additional credits were taken during fiscal 2021. We also elected to defer the employer-paid part of social security taxes beginning with pay dates on and after March 12, 2020. At June 30, 2021, we deferred a total of $3.9 million in employer-paid social security taxes, of which 50% was recorded on our consolidated balance sheet within Accounts payable and accrued expenses with the remaining balance in Other long-term liabilities because we are not required to pay any part of the deferred amount until December 31, 2021, at which time 50% is due, with the remaining amount due December 31, 2022.

Fiscal 2022 and Beyond. Demand trends remain strong across the business with backlog at record levels. As we head into the fiscal 2022 year, we are focused on continuing to increase capacity and deliver product while making investments in technology solutions across the Company, all to enhance the customer experience, drive future growth and emerge stronger in a post-pandemic environment. We believe we have an opportunity to continue our growth in sales and profitability due to our retail network, the personal service of our interior design professionals increasingly combined with technology, our unique vertical integration whereby 75% of products are made in our North American manufacturing workshops, and our logistics network of national distribution centers and retail home delivery centers delivering product with white glove service to our clients’ homes.

Key Operating Metrics

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

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The components of consolidated net sales and operating income (loss) by business segment are presented in the following table (in millions):

A summary of segment changes from the applicable prior fiscal year is presented in the following table:

The following table shows selected design center location information.

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Results of Operations

For an understanding of the significant factors that influenced our financial performance in fiscal 2021 compared with fiscal 2020, the following discussion should be read in conjunction with the consolidated financial statements and related notes presented under Item 8 in this Annual Report on Form 10-K.

Fiscal 2021 Compared to Fiscal 2020

Consolidated net sales for fiscal 2021 were $685.2 million, an increase of 16.2% compared with the same prior year period. Net sales increased by 22.2% within the wholesale segment and by 19.9% in the retail segment. Consolidated net sales were 16.2% higher primarily due to a strong pace of written orders during the year combined with our manufacturing facilities ramping up production to meet this demand after the temporary plant closures in our first quarter of fiscal 2021. While our written orders have outpaced current production, we continue to improve capacity and work through existing backlog. Our production cycle from written order to delivery has been extended due to the impact of COVID-19 and its effects on manufacturing productivity, raw materials and our supply chain. As a result, we believe it will take the next couple quarters for manufacturing to catch up to the increase in customer demand. Partially offsetting these sales increases was a decline in contract sales, which fell 23.7%. The year over year decrease in contract sales was attributable to a decline in sales from the GSA contract, which was negatively impacted by COVID-19 related economic disruptions and delays. While we continue to work through raw material shortages and managing the increased cost of shipping, there is an opportunity to continue positive growth in delivered net sales based on the size of our order backlog and continued written order growth.

Wholesale net sales increased 22.2% to $413.1 million primarily due to a 34.1% increase in intersegment sales to our Company-operated design centers combined with an increase in sales to U.S. independent dealers partially offset by lower contract and international sales, including shipments to China. Excluding intersegment sales to our retail segment, wholesale net sales were up 2.5% year over year. Net sales growth of 32.2% to our U.S. independent dealers was partially offset by a 23.7% decrease in contract sales and a 6.9% decline in international sales. The decline in our contract business sales was primarily due to lower GSA sales from delayed purchase commitments combined with a slow-down in the hospitality sector. Our international net sales were negatively impacted by an 8.1% reduction in net shipments to China during fiscal 2021. Our international sales to independent retailers represented 4.3% of total wholesale net sales compared to 5.7% last year.

Wholesale orders booked, which represents orders booked through all of our channels, were up 31.7% in fiscal 2021 compared with fiscal year 2020. Wholesale orders from our Company-operated design centers increased 44.3% while our independent North American retail network increased 49.4%. Partially offsetting the growth was a 28.3% decrease in our contract business and a 6.5% decrease in international retailer orders from China, mainly due to COVID-19 stay-at-home orders, the imposition of tariffs by China and the economic uncertainty surrounding the international trade disputes. While the full fiscal 2021 year wholesale orders growth was 31.7%, the Company accelerated its order growth during its fiscal 2021 fourth quarter. Wholesale orders during the just completed fourth quarter were up 82.3% year over year, demonstrating the strength of the brand in the marketplace combined with heightened demand for product offerings and design services. In addition, the fourth quarter of fiscal 2021 marked the first period during fiscal 2021 whereby our contract orders increased in volume, as orders were up 49.1% over the year ago fourth quarter and up 5.4% from 2019. Our wholesale backlog increased 88.1% compared to the prior year as written orders significantly outpaced net delivered. The number of weeks of backlog was comparable to June last year despite the 31.7% increase in fiscal 2021 orders as production continues to ramp up to pre-COVID-19 levels. We remain focused on our short-term ability to increase wholesale production and shipping to the levels that are necessary to properly service our customers and reduce our backlog during fiscal 2022.

Retail net sales from Company-operated design centers increased 19.9% to $555.0 million. There was a 20.0% increase in net sales in the United States, while sales from our Canadian design centers increased 17.2%. Retail written orders grew 47.7% year over year, reflecting the strength of our product offerings and interior design professionals increasingly combining technology with their personal service and continued consumer interest in the home. Net sales and order growth comparisons for the current year were also aided by the temporary closing of our North American design centers for almost three months during fiscal 2020. Since all our design centers have re-opened, we have continued to experience strong order trends with written orders up 105.0% in the just completed fourth quarter compared with a year ago, driven by increased demand for products in the home furnishings category. In addition, our e-commerce business was a strong contributor to retail net sales, up 87.5% year over year, as our online traffic continues to be strong. As of June 30, 2021, there were 141 Company-operated design centers compared with 144 last year.

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Gross profit increased 21.7% to $393.1 million compared with the prior year period due to sales growth within both the wholesale and retail segments, a change in the sales mix and higher wholesale manufacturing production levels. Wholesale gross profit was positively impacted by higher sales volumes and manufacturing production levels partially offset by higher shipping container and raw material costs. Each product category within wholesale (upholstery, case goods and home accents) expanded gross margin during fiscal 2021, which combined with increased net sales, drove higher gross profit within the wholesale segment. Retail gross profit was up due to a 19.9% increase in net shipments partially offset by a 20 basis point decrease in retail gross margin from lower premier home delivery revenue and increased promotional fees from financing promotions.

Gross margin was 57.4% compared with 54.8% a year ago. Restructuring charges negatively impacted the fiscal 2021 consolidated gross margin by 10 basis points compared with 90 basis points a year ago. The increase in consolidated gross margin was also due to higher productivity in our wholesale manufacturing and a change in the sales mix. Retail sales, as a percentage of total consolidated sales, were 81.0% in the current year, up from 78.5% in the prior year, which change in the sales mix positively affected consolidated gross margin. Benefits being realized due to increased productivity from the prior year manufacturing and logistics optimization project also expanded the wholesale gross margin.

Operating expenses increased to $315.8 million compared with $308.5 million in the prior year period. The 2.4% increase was from higher selling costs and a prior year gain of $11.5 million from the sale of a wholesale property partially offset by lower general and administrative expenses. Retail selling expenses were up 7.8% due to the 19.9% increase in net sales, which drove higher delivery costs as well as increased variable compensation. Wholesale selling costs grew by 0.5% as fuel and freight costs increased during the year from higher sales volumes, which were partially offset by a reduction in marketing spend. General and administrative expenses decreased due to lower compensation costs from reduced headcount coupled with lower occupancy costs, reduced travel expenses and regional management charges. These decreases were partially offset by higher bonus and share-based compensation expense. Restructuring and impairment charges incurred during fiscal 2021 was an expense of $2.4 million compared to a benefit of $3.0 million last year, which included an $11.5 million gain on sale of a wholesale property.

Operating income was $77.3 million compared with $14.6 million in the prior year. Adjusted operating income, which excludes restructuring and other charges, was $80.3 million in fiscal 2021, up from $17.1 million last year. The significant increase in operating income was driven by the $95.3 increase in consolidated net sales and gross margin expansion partially offset by a 2.4% increase in operating expenses. Our ability to maintain disciplined cost and expense controls, including strong cost containment measures and expense management during fiscal 2021 was a key to operating income growth. Compared to two years ago, our headcount is down 548 associates. Our ability to operate the business with global headcount down 11.6% from two years ago has contributed to consolidated operating income and margin expansion.

Wholesale operating income totaled $52.3 million, or 12.7% of net sales, compared to $33.1 million at 9.8% of net sales in the prior year. Prior year wholesale operating income included an $11.5 million gain on the sale of a wholesale property partially offset by $5.7 million in inventory write-downs, optimization costs and other. Adjusted wholesale operating income was up $25.5 million or 93.4% due to the 22.2% increase in wholesale net sales, gross margin expansion and strong cost containment measures, including improved expense management and prudent hiring throughout the year, partially offset by higher freight costs from increased shipping volumes and increased raw material pricing.

Retail operating income was $28.8 million, or 5.2% of sales, compared to a loss of $21.4 million, or 4.6% of sales a year ago. Retail operating margin improved to 5.2% due to the $92.2 million increase in net sales as well as a 3.3% decrease in operating expenses from administrative, occupancy, advertising, and regional management costs, partially offset by a 20 basis point decline in gross margin and higher selling and delivery expenses. Total retail operating expenses contracted 3.3% compared to sales growth of 19.9% and represented 41.6% of net sales compared to 51.6% a year ago. The decreases within retail operating expenses were due to reduced administrative headcount and strong cost control measures implemented during the fourth quarter a year ago. Retail restructuring and impairment charges lowered retail operating income by $2.5 million during fiscal 2021 compared to $7.7 million a year ago.

Income tax expense was $16.4 million for fiscal 2021 compared with $5.3 million a year ago. The effective tax rate for fiscal 2021 includes a provision for income taxes on the current year’s income including federal, state, foreign and local income taxes, tax and interest expense on various uncertain tax positions, and tax expense on the maintenance of a valuation allowance on non-U.S. retail deferred tax assets, partially offset by the reversal of valuation allowance on state and local retail deferred tax assets and the reversal of various uncertain tax positions. The effective tax rate in fiscal 2020 includes a provision for income taxes on the current year’s income including federal, state, foreign and local income taxes, tax and interest expense on various uncertain tax positions, and tax expense on the establishment and maintenance of a valuation allowance on retail deferred tax assets, partially offset by the reversal of various uncertain tax positions. Income tax expense was $11.1 million higher in fiscal 2021 compared with a year ago due to the $62.2 million increase in income before income taxes combined with a valuation allowance reversal during fiscal 2021. The current year effective rate decreased to 21.5% compared with 37.3% in the prior year primarily due to the reversal of a valuation allowance on retail state and local deferred tax assets combined with the recording of a valuation allowance in the year ago fourth quarter on certain deferred tax assets.

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Net income was $60.0 million compared with $8.9 million in the prior year, which resulted in $2.37 per diluted share compared with $0.34 in the prior year period. Fiscal 2020 was negatively impacted by restructuring and impairment charges combined with other corporate actions of $4.6 million (net of tax), which lowered diluted EPS by $0.18. Significant net income and diluted EPS growth in fiscal 2021 was primarily due to net sales growth of 16.2%, an expanded wholesale gross margin from optimization efficiencies, strong cost containment measures resulting in keeping operating expense growth minimal and improving production and delivery of products to customers. In addition, fiscal 2020 was negatively impacted from the COVID-19 pandemic, including the temporarily closing of our design centers and manufacturing facilities during the fourth quarter of fiscal 2020.

Fiscal 2020 Compared to Fiscal 2019

For a comparison of our results of operations for the fiscal years ended June 30, 2020 and 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on August 27, 2020.

Regulation G Reconciliations of Non-GAAP Financial Measures

To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures, including adjusted gross profit and margin, adjusted operating income, adjusted wholesale operating income and margin, adjusted retail 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 GAAP are shown in tables below.

These non-GAAP measures are derived from the consolidated financial statements but are not presented in accordance with 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 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 GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.

Despite the limitations of 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 tools that management uses to assess progress in achieving our goals. Adjusted measures may also facilitate comparisons to our historical performance.

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The following tables below show a reconciliation of non-GAAP financial measures used in this filing to the most directly comparable GAAP financial measures.

* Adjustments to reported GAAP financial measures including gross profit and margin, operating income and margin, net income, and diluted EPS have been adjusted by the following:

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Liquidity

We are committed to maintaining a strong balance sheet in order to weather difficult industry conditions, to allow us to take advantage of opportunities as market conditions improve, and to execute our long-term strategic initiatives. Our sources of liquidity include cash and cash equivalents, cash flow from operations and amounts available under our credit facility. We believe these sources remain adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, and fulfill other cash requirements for day-to-day operations and capital expenditures.

As further described under Item 1, Business, on April 1, 2020 we announced our action plan whereby we instituted several cost-saving measures at the start of the COVID-19 pandemic, in part to maintain our liquidity. We have since seen a significant improvement in business conditions, which has increased our profitability and generated strong positive cash flow.

We believe our liquidity (cash on hand of $104.6 million, cash flow from operating activities of $129.9 million and amounts available under our credit facility of $75.7 million), will be sufficient to fund our operations, including changes in working capital, anticipated capital expenditures, fiscal 2022 contractual obligations of $91.1 million and other financing activities, as they occur, for at least the next 12 months. As of June 30, 2021, we had working capital of $71.4 million compared to $91.0 million at June 30, 2020 and a current ratio of 1.32 at June 30, 2021 compared to 1.65 a year ago. During this continued period of uncertainty and volatility related to the COVID-19 pandemic, we will continue to monitor our liquidity. Included in our cash and cash equivalents at June 30, 2021, is $5.3 million held by foreign subsidiaries, a portion of which we have determined to be indefinitely reinvested.

Summary of Cash Flows

At June 30, 2021, we held cash and equivalents of $104.6 million compared with $72.3 million a year ago. Cash and cash equivalents aggregated to 15.3% of our total assets at June 30, 2021, compared with 11.6% last year. Our cash and cash equivalents increased $32.3 million during fiscal 2021 due to net cash provided by operating activities of $129.9 million and net proceeds of $4.9 million from the sale of property, plant, and equipment, partially offset by the repayment of 100% or $50.0 million of outstanding borrowings, $43.3 million in cash dividends paid and capital expenditures of $12.0 million.

The following table illustrates the main components of our cash flows for each of the last three fiscal years (in millions):

Cash Provided By (Used in) Operating Activities. Fiscal 2021 cash generated from operations totaled $129.9 million, an increase of $77.2 million from the prior year primarily due to an increase in net income and improved working capital driven by higher retail customer deposits and timing of vendor payables partially offset by increased inventory levels to support manufacturing production growth. Customer deposits from written orders for the Company’s retail segment more than doubled during fiscal 2021 and totaled $130.6 million at June 30, 2021. Strong written retail order growth of 47.7% outpaced net delivered sales growth of 19.9% and led to high customer deposits and backlog at June 30, 2021. Restructuring payments in fiscal 2021 included $1.8 million in lease exit costs and $0.9 million in severance. As a result of fiscal 2020 adoption of the new leasing standard, we report non-cash operating lease costs as a non-cash adjustment to reconcile to net income while our monthly lease payments are reported as a reduction to operating lease liabilities within working capital.

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Cash Provided by (Used in) Investing Activities. Fiscal 2021 cash used in investing activities was $7.1 million, an increase from $4.6 million last year due to cash proceeds of $12.4 million received last year from the sale of property, plant and equipment partially offset by lower capital expenditures, fiscal 2021 proceeds received from the sale of property, plant and equipment and no design center acquisitions in the current year. Cash paid to acquire design centers from our independent retailers in arm’s length transactions totaled $1.4 million during fiscal 2020 while there were no such acquisitions this year. We completed the sale of two retail properties to independent third parties for total fiscal 2021 cash proceeds of $4.9 million from the sale of property, plant and equipment. Capital expenditures in fiscal 2021 were $12.0 million, down $3.7 million compared with the prior year. As part of our initial response to the COVID-19 pandemic beginning in March 2020, we delayed investments and capital expenditures, which led to a reduction in capital spending. Partially offsetting the decreases was our investment in the expansion of our existing Maiden, North Carolina manufacturing campus, which we believe will help increase overall capacity beginning in fiscal 2022. We expect capital expenditures to reaccelerate in fiscal 2022 and should range between $16 million and $18 million as we further invest in technology, increase manufacturing capacity and open new or relocate design centers while also continuing to improve all our design centers projection.

Cash Provided By (Used in) Financing Activities. Fiscal 2021 total cash used in financing activities was $91.0 million compared with cash provided of $3.7 million in the prior year. The significant change in cash used in financing activities was due to $100.0 million in borrowings on our revolving credit facility in the prior year and a $21.8 million increase in cash dividends paid partially offset by a $24.2 million reduction in share repurchases and $2.9 million in proceeds from employee stock option exercises. During March 2020, we borrowed a total of $100.0 million under the credit facility and repaid $50.0 million during the fourth quarter of fiscal 2020 with the remaining $50.0 million repaid in fiscal 2021. Cash dividends paid in the current year totaled $43.3 million compared with $21.5 million last year due to a $0.75 per share special cash dividend paid in May 2021 totaling $19.0 million. On April 28, 2020, we had suspended our regular quarterly cash dividend due to the COVID-19 impact. However, on August 4, 2020, our Board of Directors reinstated the regular quarterly cash dividend. Our policy is to issue quarterly dividends, and we expect to continue to declare and pay comparable quarterly dividends for the foreseeable future, business conditions permitting. These changes in cash flow outflow were partially offset by the decrease in repurchases of common stock in the current year. In the prior year we repurchased 1,538,363 shares under our existing share repurchase program at an average price of $15.81 per share for a total cash outflow of $24.3 million, while in fiscal 2021 there were no repurchases.

Exchange Rate Changes. Due to changes in exchange rates, our cash and cash equivalents increased by $0.8 million from the end of fiscal year 2020 to the end of fiscal 2021. These changes impacted our cash balances held in Canada, Mexico, and Honduras.

Capital Resources including Material Cash Requirements

Sources of Liquidity

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. During March 2020, we borrowed a total of $100 million under the credit facility, repaid $50 million in June 2020 and the remaining $50 million in September 2020 from available cash. Prior to March 2020, there were no borrowings outstanding under the credit facility. We had elected to draw down on the credit facility in March 2020 to increase our cash position as a precautionary measure and to preserve financial flexibility in consideration of the disruption and uncertainty surrounding the ongoing COVID-19 pandemic. Strong cash flow generation allowed us to repay 100% of our borrowings and still end the fiscal 2021 year with a cash on hand balance of $104.6 million. The previously outstanding borrowings carried a weighted average interest rate of 1.7%, which was equal to the one-month LIBOR rate plus a spread using a debt leverage pricing grid. The outstanding borrowings of $50 million at June 30, 2020 are reported as Long-term debt within the consolidated balance sheet. Total availability under the revolving credit facility was $75.7 million at June 30, 2021 and $58.9 million at June 30, 2020. At both June 30, 2021 and 2020, respectively, we were in compliance with all the covenants under the revolving credit facility. For a detailed discussion of revolving credit facility, our debt obligations and timing of our related cash payments see Note 11 to the consolidated financial statements included under Part II, Item 8 of this Annual Report on Form 10-K.

Letters of Credit. At June 30, 2021 and 2020, there was $5.0 million and $5.8 million, respectively, of standby letters of credit outstanding under the revolving credit facility.

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Uses of Liquidity

Capital Expenditures. As part of our initial response to the COVID-19 pandemic begging in early 2020, we delayed investments and capital expenditures, which led to a reduction in capital spending. Capital expenditures in fiscal 2021 were $12.0 million, down $3.7 million compared with the prior year period. The decrease of $3.7 million from the prior year related primarily to reduced spending of $1.8 million on retail design center improvements and $1.6 million less in manufacturing. In fiscal 2021, 53% of our total capital expenditures related to opening new and relocating design centers in desirable locations, updating existing design center projections and floor plans, opening new home delivery centers and installing additional technology within each design center, including new designer workstations and tablets. The remaining 47% was capital expenditures incurred in connection with the expansion of our existing Maiden, North Carolina manufacturing facility, investments in additional technology to improve existing workflows and infrastructure enhancements. In fiscal 2020, approximately 53% of our total capital expenditures were within the retail segment. We have no material contractual commitments outstanding for future capital expenditures. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

Acquisitions. From time to time, we acquire design centers from our independent retailers in arm’s length transactions. There were no dealer acquisitions in fiscal 2021 compared with $1.4 million during fiscal 2020.

Focus on Shareholder Returns.

Dividends. Our Board of Directors has sole authority to determine if and when we will declare future dividends and on what terms. Over the past year, the following actions were taken pertaining to dividends.

For the full fiscal 2021 year, we paid a total of $1.71 per share in cash dividends for an aggregate total of $43.3 million. This included the special dividend paid in May 2021 totaling $19.0 million. In the prior year, total dividends paid were $21.5 million. With our dividends, we have returned $161.3 million to shareholders over the past five years and $526.3 million since 1993.

We will continue to monitor the pace of business as it relates to future dividends and any future cash dividends will depend on our earnings, capital requirements, financial condition and other factors considered relevant by us, subject to final determination by our Board of Directors.

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Share Repurchase Program. There were no share repurchases under our existing multi-year share repurchase program (the “Share Repurchase Program”) during fiscal 2021. We repurchased 1,538,363 shares under the program during fiscal 2020 at an average price of $15.81 per share. On January 13, 2020, our Board of Directors authorized an increase in the aggregate share repurchase authorization to 3,000,000 shares. At June 30, 2021, we had a remaining Board authorization to repurchase 2,007,364 shares of our common stock pursuant to our program. The timing and amount of any future share repurchases in the open market and through privately negotiated transactions will be determined by the Company’s officers at their discretion and based on a number of factors, including an evaluation of market and economic conditions while also maintaining financial flexibility in consideration of the COVID-19 pandemic.

Material Cash Requirements from Contractual Obligations. As of June 30, 2021, we had total contractual obligations of $203.9 million, a decrease from $233.4 million a year ago due to the $50.0 million debt repayment in fiscal 2021. Our material cash requirements for our contractual obligations as of June 30, 2021 were as follows:

For a discussion of our liquidity and capital resources as of and our cash flow activities for the fiscal year ended June 30, 2020 and 2019, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, filed with the SEC on August 27, 2020.

Other Arrangements

We do not utilize or employ any other arrangements, including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations. We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided.

Product Warranties. Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties and are provided based on terms that are generally accepted in the industry. All our domestic independent retailers are required to enter into and perform in accordance with the terms and conditions of a warranty service agreement. We record provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and make periodic adjustments to those provisions to reflect actual experience. On rare occasion, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyond the scope of our historical experience. We provide for such warranty issues as they become known and are deemed to be both probable and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience. As of June 30, 2021 and 2020, our product warranty liability totaled $1.1 million and $0.9 million, respectively.

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Contingencies

We are involved in various claims and litigation as well as environmental matters, which arise in the normal course of business. Although the final outcome of these legal and environmental matters cannot be determined, based on the facts presently known, it is our opinion that the final resolution of these matters will not have a material adverse effect on our financial position or future results of operations.

Critical Accounting Estimates

We prepare our consolidated financial statements in conformity with GAAP. In some cases, these principles require management to make difficult and subjective judgments regarding uncertainties and, as a result, such estimates and assumptions may significantly impact our financial results and disclosures. We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period, or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. We base our estimates on currently known facts and circumstances, prior experience and other assumptions we believe to be reasonable. We use our best judgment in valuing these estimates and may, as warranted, use external advice. Actual results could differ from these estimates, assumptions, and judgments and these differences could be significant. We make frequent comparisons throughout the year of actual experience to our assumptions to reduce the likelihood of significant adjustments and will record adjustments when differences are known.

The following critical accounting estimates affect our consolidated financial statements.

Impairment of Long-Lived Assets, including the Assessment of the Carrying Value of Retail Design Center Long-lived Assets. The recoverability of our retail design centers’ long-lived assets is evaluated for impairment whenever events or changes in circumstances indicate that we may not be able to recover the carrying amount of an asset or asset group. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, change in the intended use of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash flows over the remaining life of the primary asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted cash flow analysis or independent third-party appraisal of the asset or asset group. While determining fair value requires a variety of input assumptions and judgment, we believe our estimates of fair value are reasonable. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets, which for our retail segment is the individual design center. For retail design center level long-lived assets, expected cash flows are determined based on our estimate of future net sales, margin rates and expenses over the remaining expected terms of the leases.

Goodwill and Indefinite-Lived Intangible Assets. We review the carrying value of our goodwill and other intangible assets with indefinite lives at least annually, during the fourth quarter, or more frequently if an event occurs or circumstances change, for possible impairment.

Goodwill. For impairment testing, goodwill has been assigned to our wholesale reporting unit. We may elect to evaluate qualitative factors to determine if it is more likely than not that the fair value of a reporting unit or fair value of indefinite lived intangible assets is less than its carrying value. If the qualitative evaluation indicates that it is more likely than not that the fair value of a reporting unit or indefinite lived intangible asset is less than its carrying amount, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for a reporting unit or indefinite lived intangible asset and directly perform a quantitative assessment.

A quantitative impairment test involves estimating the fair value of each reporting unit and indefinite lived intangible asset and comparing these estimated fair values with the respective reporting unit or indefinite lived intangible asset carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to such excess, limited to the total amount of goodwill allocated to the reporting unit. If the carrying value of an individual indefinite lived intangible asset exceeds its fair value, such individual indefinite lived intangible asset is written down by an amount equal to such excess. Estimating the fair value of reporting units and indefinite lived intangible assets involves the use of significant assumptions, estimates and judgments with respect to a number of factors, including sales, gross margin, general and administrative expenses, capital expenditures, EBITDA and cash flows, the selection of an appropriate discount rate, as well as market values and multiples of earnings and revenue of comparable public companies.

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To evaluate goodwill in a quantitative impairment test, the fair value of the reporting units is estimated using a combination of Market and Income approaches. The Market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). In the Market approach, the “Guideline Company” method is used, which focuses on comparing the Company’s risk profile and growth prospects to reasonably similar publicly traded companies. Key assumptions used for the Guideline Company method include multiples for revenues, EBITDA and operating cash flows, as well as consideration of control premiums. The selected multiples are determined based on public companies within our peer group, and if appropriate, recent comparable transactions are also considered. Control premiums are determined using recent comparable transactions in the open market. Under the Income approach, a discounted cash flow method is used, which includes a terminal value, and is based on management’s forecasts and budgets. The long-term terminal growth rate assumptions reflect our current long-term view of the market in which we compete. Discount rates use the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

The Company performed its annual goodwill impairment test during the fourth quarter of fiscal 2021 utilizing a qualitative analysis and concluded it was more likely than not the fair value of our wholesale reporting unit was greater than its respective carrying value and no impairment charge was required. In performing the qualitative assessment, we considered such factors as macro-economic conditions, industry and market conditions in which we operate including the competitive environment and any significant changes in demand. We also considered our stock price both in absolute terms and in relation to peer companies.

Other Indefinite-Lived Intangible Assets. We also annually evaluate whether our trade name continues to have an indefinite life. Our trade name is reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, management’s plans for future operations, recent results of operations and projected future cash flows.

Similar to goodwill, we may elect to perform a qualitative assessment. If the qualitative evaluation indicates that it is more likely than not the fair value of our trade name was greater than its carrying value, a quantitative impairment test is required. Alternatively, we may bypass the qualitative assessment for our indefinite lived intangible asset and directly perform a quantitative assessment. To evaluate our trade name using a quantitative analysis, its fair value is calculated using the relief-from-royalty method. Significant factors used in the trade name valuation are rates for royalties, future revenue growth and a discount factor. Royalty rates are determined using an average of recent comparable values, review of the operating margins and consideration of the specific characteristics of the trade name. Future growth rates are based on the Company’s perception of the long-term values in the market in which we compete, and the discount rate is determined using the weighted average cost of capital for companies within our peer group, adjusted for specific company risk premium factors.

We performed our annual indefinite-lived intangible asset impairment test during the fourth quarter of fiscal 2021 utilizing a qualitative analysis and concluded it was more likely than not the fair value of our trade name was greater than its carrying value and no impairment charge was required. Qualitative factors reviewed included a review for significant adverse changes in customer demand or business climate that could affect the value of the asset, a product recall or an adverse action or assessment by a regulator.

Inventories. Inventories (finished goods, work in process and raw materials) are stated at the lower of cost, determined on a first-in, first-out basis, and 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). We estimate an inventory reserve for excess quantities and obsolete items based on specific identification and historical write-downs, taking into account future demand and market conditions. Our inventory reserves contain uncertainties that require management to make assumptions and to apply judgment regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. We adjust our inventory reserves for net realizable value and obsolescence based on trends, aging reports, specific identification and estimates of future retail sales prices. If actual demand or market conditions change from our prior estimates, we adjust our inventory reserves accordingly throughout the period. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the periods presented.

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Income Taxes. We are subject to income taxes in the United States and other foreign jurisdictions. Our tax provision is an estimate based on our understanding of laws in Federal, state and foreign tax jurisdictions. These laws can be complicated and are difficult to apply to any business, including ours. The tax laws also require us to allocate our taxable income to many jurisdictions based on subjective allocation methodologies and information collection processes.

We use the asset and liability method to account for income taxes. We recognize deferred tax assets and liabilities based on the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates in effect for the year in which we expect to recover or settle those temporary differences. When we record deferred tax assets, we are required to estimate, based on forecasts of taxable earnings in the relevant tax jurisdiction, whether we are more likely than not to recover them. In making judgments about realizing the value of our deferred tax assets, we consider historic and projected future operating results, the eligible carry-forward period, tax law changes and other relevant considerations.

The Company evaluates, on a quarterly basis, uncertain tax positions taken or expected to be taken on tax returns for recognition, measurement, presentation, and disclosure in its financial statements. If an income tax position exceeds a 50% probability of success upon tax audit, based solely on the technical merits of the position, the Company recognizes an income tax benefit in its financial statements. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The liability associated with an unrecognized tax benefit is classified as a long-term liability except for the amount for which a cash payment is expected to be made or tax positions settled within one year.

Business Insurance Reserves. We have insurance programs in place to cover workers’ compensation and health care benefits under certain employee benefit plans provided by the Company. The insurance programs, which are funded through self-insured retention, are subject to various stop-loss limitations. We accrue estimated losses using actuarial models and assumptions based on historical loss experience. Although we believe that the insurance reserves are adequate, the reserve estimates are based on historical experience, which may not be indicative of current and future losses. In addition, the actuarial calculations used to estimate insurance reserves are based on numerous assumptions, some of which are subjective. We adjust insurance reserves, as needed, in the event that future loss experience differs from historical loss patterns.

Significant Accounting Policies

See Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included under Part II, Item 8, for a full description of our significant accounting policies.

Recent Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies, in the notes to our consolidated financial statements included under Part II, Item 8, for a full description of recent accounting pronouncements, including the expected dates of adoption, which we include here by reference.