Table of Contents
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 September 30, 2008
|
|
|
OR
|
|
|
o
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For
the transition period from
to
|
|
Commission File Number: 1-11692
|
Ethan
Allen Interiors Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
06-1275288
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
Ethan
Allen Drive, Danbury, Connecticut
|
|
06811
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(203)
743-8000
(Registrants
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year, if changed since last report)
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
o
No
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act
Large accelerated filer
|
x
|
|
Accelerated filer
|
o
|
Non-accelerated filer
|
o
|
|
Smaller reporting company
|
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
o
Yes
x
No
Indicate the number of
shares outstanding of each of the issuers classes of common stock, as of the
latest practicable date.
At
September 30, 2008, there were 28,709,049 shares of Class A Common
Stock,
par
value $.01, outstanding.
Table
of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In
thousands, except share data)
|
|
September 30,
2008
|
|
June 30, 2008
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,917
|
|
$
|
74,376
|
|
Accounts receivable, less allowance for
doubtful accounts of $1,842 at September 30, 2008 and $2,535 at June 30,
2008
|
|
11,549
|
|
12,672
|
|
Inventories (note 4)
|
|
187,495
|
|
186,265
|
|
Prepaid expenses and other current assets
|
|
22,016
|
|
32,860
|
|
Deferred income taxes
|
|
4,188
|
|
4,005
|
|
Total current assets
|
|
305,165
|
|
310,178
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
355,036
|
|
350,432
|
|
Goodwill and other intangible assets (notes
6 and 7)
|
|
94,633
|
|
96,823
|
|
Other assets
|
|
4,423
|
|
4,540
|
|
Total assets
|
|
$
|
759,257
|
|
$
|
761,973
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current maturities of long-term debt (note
8)
|
|
$
|
41
|
|
$
|
41
|
|
Customer deposits
|
|
42,640
|
|
47,297
|
|
Accounts payable
|
|
25,894
|
|
26,444
|
|
Accrued compensation and benefits
|
|
33,725
|
|
32,568
|
|
Accrued expenses and other current
liabilities (note 5)
|
|
34,331
|
|
29,152
|
|
Total current liabilities
|
|
136,631
|
|
135,502
|
|
|
|
|
|
|
|
Long-term debt (note 8)
|
|
203,018
|
|
202,988
|
|
Other long-term liabilities
|
|
20,661
|
|
20,383
|
|
Deferred income taxes
|
|
22,948
|
|
27,327
|
|
Total liabilities
|
|
383,258
|
|
386,200
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Class A common stock, par value $.01,
150,000,000 shares authorized; 48,274,870 shares issued at September 30,
2008 and 48,251,780 shares issued at June 30, 2008
|
|
482
|
|
482
|
|
Class B common stock, par value $.01,
600,000 shares authorized; no shares issued and outstanding at
September 30, 2008 and June 30, 2008
|
|
|
|
|
|
Preferred stock, par value $.01, 1,055,000
shares authorized; no shares issued and outstanding at September 30,
2008 and June 30, 2008
|
|
|
|
|
|
Additional paid-in capital
|
|
355,121
|
|
354,725
|
|
|
|
355,603
|
|
355,207
|
|
Less: Treasury stock (at cost), 19,565,821
shares at September 30, 2008 and 19,565,901 shares at June 30, 2008
|
|
(588,783
|
)
|
(588,783
|
)
|
Retained earnings
|
|
606,857
|
|
606,648
|
|
Accumulated other comprehensive income
(note 12)
|
|
2,322
|
|
2,701
|
|
Total shareholders equity
|
|
375,999
|
|
375,773
|
|
Total liabilities and shareholders equity
|
|
$
|
759,257
|
|
$
|
761,973
|
|
See
accompanying notes to consolidated financial statements.
2
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated
Statements of Operations (Unaudited)
(In thousands, except per share data)
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net sales
|
|
$
|
205,841
|
|
$
|
248,727
|
|
Cost of sales
|
|
93,900
|
|
115,270
|
|
Gross profit
|
|
111,941
|
|
133,457
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling
|
|
55,302
|
|
57,578
|
|
General and administrative
|
|
46,058
|
|
48,082
|
|
Restructuring and impairment charge
(credit), net (note 5)
|
|
(1,630
|
)
|
|
|
Total operating expenses
|
|
99,730
|
|
105,660
|
|
|
|
|
|
|
|
Operating income
|
|
12,211
|
|
27,797
|
|
Interest and other miscellaneous income,
net
|
|
1,100
|
|
2,922
|
|
Interest and other related financing costs
(note 8)
|
|
2,901
|
|
2,935
|
|
|
|
|
|
|
|
Income before income taxes
|
|
10,410
|
|
27,784
|
|
|
|
|
|
|
|
Income tax expense (note 3)
|
|
2,988
|
|
10,280
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,422
|
|
$
|
17,504
|
|
|
|
|
|
|
|
Per share data (note 11):
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
Net income per basic share
|
|
$
|
0.26
|
|
$
|
0.58
|
|
Basic weighted average common shares
|
|
28,703
|
|
30,084
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Net income per diluted share
|
|
$
|
0.26
|
|
$
|
0.57
|
|
Diluted weighted average common shares
|
|
28,847
|
|
30,464
|
|
See accompanying notes to consolidated
financial statements.
3
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows (Unaudited)
(In thousands)
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating activities:
|
|
|
|
|
|
Net income
|
|
$
|
7,422
|
|
$
|
17,504
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
6,318
|
|
5,937
|
|
Compensation expense related to share-based
awards
|
|
394
|
|
132
|
|
Provision (benefit) for deferred income
taxes
|
|
(1,850
|
)
|
49
|
|
Excess tax benefits from share-based
payment arrangements
|
|
|
|
(2,081
|
)
|
Restructuring and impairment charge
(benefit), net
|
|
(3,854
|
)
|
|
|
(Gain) loss on disposal of property, plant
and equipment
|
|
(5
|
)
|
(552
|
)
|
Other
|
|
66
|
|
69
|
|
Change in assets and liabilities, net of
the effects of acquired businesses:
|
|
|
|
|
|
Accounts receivable
|
|
931
|
|
347
|
|
Inventories
|
|
(561
|
)
|
587
|
|
Prepaid and other current assets
|
|
9,192
|
|
1,509
|
|
Other assets
|
|
84
|
|
142
|
|
Customer deposits
|
|
(5,312
|
)
|
4,144
|
|
Accounts payable
|
|
(550
|
)
|
1,970
|
|
Accrued expenses and other current
liabilities
|
|
5,253
|
|
2,552
|
|
Other long-term liabilities
|
|
547
|
|
9,141
|
|
Net cash provided by operating activities
|
|
18,075
|
|
41,450
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Proceeds from the disposal of property,
plant & equipment
|
|
5,729
|
|
5,063
|
|
Capital expenditures
|
|
(11,093
|
)
|
(12,545
|
)
|
Acquisitions
|
|
(375
|
)
|
(705
|
)
|
Other
|
|
(249
|
)
|
6
|
|
Net cash used in investing activities
|
|
(5,988
|
)
|
(8,181
|
)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Payments on long-term debt
|
|
(10
|
)
|
(9
|
)
|
Proceeds from issuance of common stock
|
|
2
|
|
307
|
|
Excess tax benefits from share-based
payment arrangements
|
|
|
|
2,081
|
|
Payment of cash dividends
|
|
(6,331
|
)
|
(6,185
|
)
|
Purchases and other retirements of company
stock
|
|
|
|
(44,101
|
)
|
Net cash used in financing activities
|
|
(6,339
|
)
|
(47,907
|
)
|
Effect of exchange rate changes on cash
|
|
(207
|
)
|
243
|
|
Net increase (decrease) in cash &
cash equivalents
|
|
5,541
|
|
(14,395
|
)
|
Cash & cash equivalents -
beginning of period
|
|
74,376
|
|
147,879
|
|
Cash & cash equivalents - end of
period
|
|
$
|
79,917
|
|
$
|
133,484
|
|
See accompanying notes to consolidated
financial statements.
4
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
Three Months Ended September 30, 2008
(Unaudited)
(In
thousands, except share data)
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Treasury
Stock
|
|
Accumulated
Other
Comprehensive
Income
|
|
Retained
Earnings
|
|
Total
|
|
Balance at June 30, 2008
|
|
$
|
482
|
|
$
|
354,725
|
|
$
|
(588,783
|
)
|
$
|
2,701
|
|
$
|
606,648
|
|
$
|
375,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense (note 10)
|
|
|
|
394
|
|
|
|
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock upon issuance of
share-based awards
|
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
(7,213
|
)
|
(7,213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
(391
|
)
|
|
|
(391
|
)
|
Loss on derivatives, net of tax and other
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
Net income
|
|
|
|
|
|
|
|
|
|
7,422
|
|
7,422
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
7,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
482
|
|
$
|
355,121
|
|
$
|
(588,783
|
)
|
$
|
2,322
|
|
$
|
606,857
|
|
$
|
375,999
|
|
See
accompanying notes to consolidated financial statements.
5
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to
Consolidated Financial Statements (Unaudited)
(1) Basis of
Presentation and Recent Accounting Pronouncements
Basis of Presentation
Ethan
Allen Interiors Inc. (Interiors) is a Delaware corporation incorporated on May 25,
1989. The consolidated financial statements include the accounts of Interiors,
its wholly owned subsidiary Ethan Allen Global, Inc. (Global), and
Globals subsidiaries (collectively We, Us, Our, Ethan Allen, or the Company). All intercompany accounts and transactions
have been eliminated in the consolidated financial statements. All of Globals capital stock is owned by
Interiors, which has no assets or operating results other than those associated
with its investment in Global.
Recently Adopted Accounting Pronouncements
On
July 1, 2008, the Financial Accounting Standards Board (FASB) issued
Statement No. 157,
Fair Value Measurements
(SFAS No. 157) which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements, yet does not require any new fair
value measurements. In February 2008,
the FASB issued FASB Staff Position No. 157-2 (FSP No. 157-2),
which delayed the effective date of SFAS No. 157 as it relates to
nonfinancial assets and nonfinancial liabilities until July 1, 2009 for
the Company, except for items that are recognized or disclosed at fair value by
the Company on a recurring basis.
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157,
except as it relates to those nonfinancial assets and nonfinancial liabilities
excluded under FSP No. 157-2. Those
excluded items for which the Company has not applied the fair value provisions
of SFAS No. 157 include goodwill and other intangible assets (note 7),
assets held for sale (note 5), liabilities for exit or disposal activities
(note 5), and business acquisitions (note 6).
The Company is currently evaluating the impact of this statement on the
Companys financial position, results of operations and cash flows as it
relates to nonfinancial assets and nonfinancial liabilities. For the impact of adoption of this statement
on financial assets, financial liabilities, and nonfinancial assets recognized
at fair value on a recurring basis, see note 13.
Statement
of Financial Accounting Standard No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115
(SFAS No. 159)
,
became effective for us on July 1,
2008. SFAS No. 159 gives us the
option to elect fair value for the initial and subsequent measurement for
certain financial assets and liabilities, with the difference between the
carrying value before election and the fair value recorded upon election as an
adjustment to beginning retained earnings.
The fair value option may be elected on an instrument by instrument
basis and is irrevocable, unless a new election date occurs. The Company did not apply the fair value
option to any of its outstanding instruments, and therefore, SFAS No. 159
did not have an impact on the Companys consolidated financial statements.
(2) Interim Financial
Presentation
All
intercompany accounts and transactions have been eliminated in the 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 months ended September 30, 2008
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 Annual Report on Form 10-K for the year ended June 30,
2008.
6
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
(3) 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 operating income; changes to actual or forecasted
permanent book to tax differences; impacts from future tax audits with state,
federal or foreign tax authorities; or impacts from tax law changes. The Company identifies items which are not
normal and are nonrecurring in nature and treats these as discrete events. The
tax effect of discrete items is recorded in the quarter in which the discrete
events occur. Due to the volatility of these factors, the Companys
consolidated effective income tax rate can change significantly on a quarterly
basis.
In
accordance with FASB Interpretation No. 48, A
ccounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109,
(FIN 48) we recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. We adopted the provisions set
forth by FIN 48 effective July 1, 2007.
Essentially
all of the unrecognized tax benefits, if recognized, would be recorded as a
benefit to income tax expense. Our continuing practice is to recognize interest
and penalties related to income tax matters as a component of income tax
expense.
The
Companys consolidated effective income tax rate was 28.7% and 37.0% for the
three months ended September 30, 2008 and 2007, respectively. The current
period lower effective tax rate is due primarily to a one time adjustment of
$0.7 million made in the current quarter.
The
Company conducts business globally and, as a result, the Company or one or more
of its subsidiaries files income tax returns in the U.S., various state, and
foreign jurisdictions. In the normal course of business, the Company is subject
to examination by the taxing authorities in such major jurisdictions as Canada,
Mexico and the U.S. As of September 30, 2008, certain subsidiaries of the
Company are currently under audit from 2001 through 2007 in the U.S. It is
reasonably possible that some of these audits may be completed during the next
twelve months. While the amount of uncertain tax benefits with respect to the
entities and years under audit may change within the next twelve months, it is
not anticipated that any of the changes will be significant.
(4) Inventories
Inventories at September 30,
2008 and June 30, 2008 are summarized as follows (in thousands):
|
|
September 30,
2008
|
|
June 30,
2008
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
154,214
|
|
$
|
153,981
|
|
Work in process
|
|
7,480
|
|
5,985
|
|
Raw materials
|
|
25,801
|
|
26,299
|
|
|
|
$
|
187,495
|
|
$
|
186,265
|
|
Inventories
are presented net of a related valuation allowance of $2.2 million at September 30,
2008 and $2.3 million at June 30, 2008.
(5) Restructuring
and Impairment Charges
In
recent years, we have developed, announced and executed plans to consolidate
our operations as part of an overall strategy to maximize production
efficiencies and maintain our competitive advantage.
7
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
On
January 10, 2008, we announced a plan to consolidate the operations of
certain company owned retail design centers and retail service centers. In
connection with this initiative, we have permanently ceased operations at
eleven design centers and six retail service centers which, for the most part,
were consolidated into other existing operations. We also implemented our design team concept
across the Retail division at the end of fiscal 2008. These decisions resulted in a reduction in
headcount of approximately 400 employees, with the reduction in headcount
occurring mostly during the third and fourth quarters of fiscal 2008. Additionally, other actions taken during
fiscal 2008 were not included in the restructuring plan. Altogether, there were
more than 500 fewer associates in our Retail business by the end of fiscal
2008. In the first quarter of fiscal 2009, a $1.6 million restructuring and
impairment net gain was recorded. Of
this amount, $4.2 million was a realized gain on the sale of property classified
as held for sale and was partially offset by $2.2 million in lease termination
costs and adjustments for expected charges on leased properties no longer being
used. Since the plan was announced, we
have recorded pre-tax restructuring and impairment charges totaling $4.8
million, including $0.9 million in employee severance and other payroll and
benefit costs, $5.3 million in lease termination and other exit costs, and a
benefit of $1.4 million on long-lived assets.
We do not anticipate any additional new charges related to this retail
restructuring, however, the estimated present value of future lease payments
with terms ranging from less than one to seven years, and one ground lease with
25 years remaining are included in the balance at September 30, 2008 and
contain estimates that will likely require adjustment in the future. In addition to the retail charges, $0.4
million was recorded in the quarter to update the fair value of a wholesale
plant site held for sale. These charges
are reported together in the following table.
Activity
in the Companys restructuring reserves is summarized as follows (in
thousands):
|
|
Balance
at June
30,
2008
|
|
New
charges
(credits)
|
|
Utilized
|
|
Adjustments
|
|
Balance at
September
30,
2008
|
|
Employee severance and other payroll and benefit costs
|
|
$
|
|
|
$
|
64
|
|
$
|
(64
|
)
|
$
|
|
|
$
|
|
|
Other plant exit costs
|
|
3,358
|
|
1,677
|
|
(1,581
|
)
|
318
|
|
3,772
|
|
Write down of long-lived assets
|
|
|
|
(4,080
|
)
|
3,688
|
|
392
|
|
|
|
|
|
$
|
3,358
|
|
$
|
(2,339
|
)
|
$
|
(2,043
|
)
|
$
|
709
|
|
$
|
3,772
|
|
(6) Business
Acquisitions
In August 2008, we
acquired in two transactions, two Ethan Allen retail design centers from
independent retailers for consideration of approximately $0.6 million of cash
and forgiveness of receivables, assumed customer deposits of $0.7 million and
other liabilities of $0.2 million. As a
result of this acquisition, we recorded additional inventory of $0.7 million
and goodwill of $0.7 million. There were
no acquisitions completed during the three months ended September 30,
2007.
All acquisitions are subject
to a contractual holdback or reconciliation period, during which the parties to
the transaction may agree to certain normal and customary purchase accounting
adjustments.
Goodwill associated with our
acquisitions represents the premium paid to the seller related to the acquired
business (i.e. market presence) and other fair value adjustments to the assets
acquired and liabilities assumed.
Further discussion of our goodwill and other intangible assets can be
found in Note 7.
8
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
A
summary of our allocation of purchase price associated with acquisitions
occurring during the three months ended September 30, 2008 is provided
below (in thousands):
Nature of acquisition
|
|
2 design centers
|
|
Total consideration
|
|
$
|
567
|
|
Fair value of assets acquired and
liabilities assumed:
|
|
|
|
Inventory
|
|
669
|
|
PP&E and other assets
|
|
49
|
|
Customer deposits
|
|
(655
|
)
|
A/P and other liabilities
|
|
(200
|
)
|
Goodwill
|
|
$
|
704
|
|
(7) Goodwill and Other Intangible Assets
As
of September 30, 2008, we had goodwill of $74.9 million and other indefinite-lived
intangible assets of $19.7 million. Comparable balances as of June 30,
2008 were $77.1 million and $19.7 million, respectively.
Goodwill
in the retail and wholesale segments was $49.4 million and $25.4 million,
respectively, at September 30, 2008 and $48.9 million and $28.2 million,
respectively, at June 30, 2008. Goodwill in the wholesale segment
decreased $2.7 million in the quarter due to the effective settlement of tax
positions taken in previous years. The
wholesale segment, at both dates, includes indefinite-lived intangible assets
of $19.7 million which represent Ethan Allen trade names.
In
accordance with SFAS No. 142,
Goodwill
and Other Intangible Assets
, we do not amortize goodwill or other
indefinite-lived intangible assets but, rather, evaluate such assets for
impairment on an annual basis and between annual tests whenever events or
circumstances indicate that the carrying value of the goodwill or other
intangible asset may exceed its fair value. We conduct our required annual impairment
test during the fourth quarter of each fiscal year. No impairment losses have
been recorded on our goodwill or other indefinite-lived intangible assets as a
result of applying the provisions of SFAS No. 142.
(8) Borrowings
Total debt obligations at September 30,
2008 and June 30, 2008 consist of the following (in thousands):
|
|
September 30,
|
|
June 30,
|
|
|
|
2008
|
|
2008
|
|
5.375% Senior Notes due 2015
|
|
$
|
198,877
|
|
$
|
198,837
|
|
Industrial revenue bonds
|
|
3,855
|
|
3,855
|
|
Other debt
|
|
327
|
|
337
|
|
Total debt
|
|
203,059
|
|
203,029
|
|
Less current maturities
|
|
41
|
|
41
|
|
Total long-term debt
|
|
$
|
203,018
|
|
$
|
202,988
|
|
On
September 27, 2005, we completed a private offering of $200.0 million of
ten-year senior unsecured notes due 2015 (the Senior Notes). The Senior Notes
were offered by Global and have an annual coupon rate of 5.375% with interest
payable semi-annually in arrears on April 1 and October 1 of each
year. Proceeds received in connection
with the issuance of the Senior Notes, net of a related discount of $1.6
million, totaled $198.4 million. We used the net proceeds from the offering to
expand our retail network, invest in our manufacturing and logistics
operations, and for other general corporate purposes. As of September 30, 2008, outstanding borrowings
related to this
9
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
transaction
have been included in the Consolidated Balance Sheets within long-term debt.
The discount on the Senior Notes is being amortized to interest expense over
the life of the related debt as is debt issuance costs of $2.0 million primarily
for banking, legal, accounting, rating agency, and printing services and $0.8
million of losses on settled forward contracts entered in conjunction with this
debt issuance.
(9) Litigation and Environmental Matters
We and our subsidiaries are
subject to various environmental laws and regulations. Under these laws, we
and/or our subsidiaries are, or may be, required to remove or mitigate the
effects on the environment of the disposal or release of certain hazardous
materials.
During
the quarter ended September 30, 2008, we resolved our liability as a
potentially responsible party (PRP) with respect to the remediation of two
active sites listed, or proposed for inclusion, on the National Priorities List
(NPL) under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA). The sites two sites are located
in Southington, Connecticut and Atlanta, Georgia. In each case, we were able to resolve our
liability as part of de minimis settlements.
As
a result, as of September 30, 2008 we remained a PRP only with respect to
the NPL site located in High Point, North Carolina. We do not anticipate incurring significant
costs with respect to the High Point, North Carolina site as we believe that we
are not a major contributor based on the very small volume of waste generated
by us in relation to total volume at that site.
Our volumetric share at the High Point site is less than 1% of over 18
million gallons disposed of at the site and there are more than 2,000 PRPs,
including more than 1,000 de minimis parties (of which we are one). The other PRPs at the site consist of local,
regional, national and multi-national companies.
Liability
under CERCLA may be joint and several. As such, to the extent certain named
PRPs are unable, or unwilling, to accept responsibility and pay their
apportioned costs, we could be required to pay in excess of our pro rata share
of incurred remediation costs. Our understanding of the financial strength of
other PRPs has been considered, where appropriate, in the determination of our
estimated liability.
In
addition, in July 2000, we were notified by the State of New York (the State)
that we may be named a PRP in a separate, unrelated matter with respect to a
site located in Carroll, New York. To date, no further notice has been received
from the State and the State has not yet conducted an initial environmental
study at this site.
As
of September 30, 2008, we believe that established reserves related to
these environmental contingencies are adequate to cover probable and reasonably
estimable costs associated with the remediation and restoration of these
sites. We believe our currently
anticipated capital expenditures for environmental control facility matters are
not material.
We
are subject to other federal, state and local environmental protection laws and
regulations and are involved, from time to time, in investigations and
proceedings regarding environmental matters.
Such investigations and proceedings typically concern air emissions,
water discharges, and/or management of solid and hazardous wastes. We believe
that our facilities are in material compliance with all such applicable laws
and regulations.
Regulations
issued under the Clean Air Act Amendments of 1990 required the industry to
reformulate certain furniture finishes or institute process changes to reduce
emissions of volatile organic compounds. Compliance with many of these
requirements has been facilitated through the introduction of high solids
coating technology and alternative formulations. In addition, we have
instituted a variety of technical and procedural controls, including
reformulation of finishing materials to reduce toxicity, implementation of high
velocity low pressure spray systems, development of storm water protection
plans and controls, and further development of related inspection/audit teams,
all of which have served to reduce emissions per unit of production. We remain
committed to implementing
10
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
new
waste minimization programs and/or enhancing existing programs with the
objective of (i) reducing the total volume of waste, (ii) limiting
the liability associated with waste disposal, and (iii) continuously
improving environmental and job safety programs on the factory floor which
serve to minimize emissions and safety risks for employees. We will continue to
evaluate the most appropriate, cost effective control technologies for
finishing operations and design production methods to reduce the use of
hazardous materials in the manufacturing process.
(10) Share-Based Compensation
On
October 10, 2007, the Companys Board of Directors and M. Farooq Kathwari,
our President and Chief Executive Officer, agreed to the terms of a new
employment agreement expiring on June 30, 2012 (the Agreement). Pursuant to the terms of the Agreement, Mr. Kathwari
was awarded options to purchase 150,000 shares of our common stock on October 10,
2007, and options to purchase an additional 90,000 shares on July 1, 2008,
in each case at the closing stock price on the grant date. The 2007 grant was issued at an exercise
price of $34.03, and vests in three installments of 33 1/3% on each June 30
of 2008, 2009 and 2010. The 2008 grant
was issued at an exercise price of $24.62, and vests in two installments of 50%
on each of June 30, 2009 and 2010.
The Agreement provides for an additional grant of 60,000 options on July 1,
2009, with an exercise price equal to the closing price of a share of our
common stock on the New York Stock Exchange on that date. The 2009 grant will vest on June 30,
2010. All options awarded under the
Agreement have a contractual term of 10 years.
In
connection with the Agreement, Mr. Kathwari received an award of 20,000
restricted shares with vesting based on continuing service and the performance
of the Companys stock price during the 32 month period subsequent to the award
date as compared to the Standard and Poors 500 index. On July 1, 2008, an additional award of
20,000 restricted shares with the same vesting conditions (over a 36 month
period) was granted. Mr. Kathwari
will also receive, as per the Agreement, an additional grant of 20,000
restricted shares on July 1, 2009 with the same 36 month vesting,
continuing service and performance conditions.
Also
in connection with the Agreement, Mr. Kathwari received on November 13,
2007 an award of 15,000 restricted shares.
These shares are service-based with 3,000 shares vesting on June 30
for each of the years 2008 through 2012.
(11) Earnings Per Share
Basic
and diluted earnings per share are calculated using the following weighted
average share data (in thousands):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Weighted average common shares outstanding
for basic calculation
|
|
28,703
|
|
30,084
|
|
Effect of dilutive stock options and other share-based
awards
|
|
144
|
|
380
|
|
Weighted average common shares outstanding
adjusted for dilution calculation
|
|
28,847
|
|
30,464
|
|
As
of September 30, 2008 and 2007, stock options to purchase 1,814 and 785
common shares, respectively, were excluded from the respective diluted earnings
per share calculation because their impact was anti-dilutive.
11
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
(12) Comprehensive Income
Total comprehensive income
represents the sum of net income and items of other comprehensive income or
loss that are reported directly in equity.
Such items, which are generally presented on a net of tax basis, may
include foreign currency translation adjustments, minimum pension liability
adjustments (i.e. gains and losses) on certain derivative instruments, and
unrealized gains and losses on certain investments in debt and equity
securities. We have reported our total
comprehensive income in the Consolidated Statements of Shareholders Equity.
Our accumulated other
comprehensive income, which is comprised of losses on certain derivative
instruments and accumulated foreign currency translation adjustments, totaled
$2.3 million at September 30, 2008 and $2.7 million at June 30,
2008. Losses on derivative instruments
are the result of cash flow hedging contracts entered into in connection with
the issuance of the Senior Notes (see Note 8).
Foreign currency translation adjustments are the result of changes in
foreign currency exchange rates related to our operation of five Ethan Allen
owned retail design centers located in Canada and our cut and sew plant located
in Mexico. Foreign currency translation
adjustments exclude income tax expense (benefit) given that the earnings of
non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of
time.
(13) Financial Instruments
We adopted SFAS No. 157
on July 1, 2008 for all financial assets and liabilities and nonfinancial
assets and liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). SFAS No. 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
SFAS No. 157 defines
fair value as the price that would be received upon sale of an asset or paid
upon transfer of a liability in an orderly transaction between market
participants at the measurement date and in the principal or most advantageous
market for that asset or liability. The fair value should be calculated based
on assumptions that market participants would use in pricing the asset or
liability, not on assumptions specific to the entity. In addition, the fair
value of liabilities should include consideration of non-performance risk
including our own credit risk.
In addition to defining fair
value, SFAS No. 157 expands the disclosure requirements around fair value
and establishes a fair value hierarchy for valuation inputs. The hierarchy
prioritizes the inputs into three levels based on the extent to which inputs
used in measuring fair value are observable in the market. Each fair value
measurement is reported in one of the three levels which is determined by the
lowest level input that is significant to the fair value measurement in its
entirety. These levels are:
·
Level
1 inputs are based upon unadjusted quoted prices for identical instruments
traded in active markets.
·
Level
2 inputs are based upon quoted prices for similar instruments in active
markets, quoted prices for identical or similar instruments in markets that are
not active, and model-based valuation techniques for which all significant
assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
·
Level
3 inputs are generally unobservable and typically reflect managements
estimates of assumptions that market participants would use in pricing the
asset or liability. The fair values are therefore determined using model-based
techniques that include option pricing models, discounted cash flow models, and
similar techniques.
12
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
The following section
describes the valuation methodologies we use to measure different financial
assets and liabilities at fair value.
Cash
Equivalents
Cash equivalents consist of money
market accounts and mutual funds in U.S. government and agency securities.
We use quoted prices in
active markets for identical assets or liabilities to determine fair
value. This pricing methodology applies
to our Level 1 cash equivalents. We do
not hold any Level 2 or Level 3 investments in our cash equivalents.
Assets and
Liabilities Measured at Fair Value on a Recurring Basis
At September 30, 2008,
the Companys assets and liabilities measured at fair value on a recurring
basis consist of $70.3 million in cash equivalents, which were valued using
Level 1 inputs.
Assets and
Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure certain assets,
including our cost and equity method investments, at fair value on a
nonrecurring basis. These assets are recognized at fair value when they are
deemed to be other-than-temporarily impaired. During the three months ended September 30,
2008, we did not record any other-than-temporary impairments on those assets
required to be measured at fair value on a nonrecurring basis.
(14) Segment Information
Our
operations are classified into two operating segments: wholesale and
retail. These operating segments
represent strategic business areas which, although they operate separately and
provide their own distinctive services, enable us to more effectively offer our
complete line of home furnishings and accessories.
The
wholesale segment is principally involved in the development of the Ethan Allen
brand, which encompasses the design, manufacture, domestic and offshore
sourcing, sale and distribution of a full range of home furnishings and
accessories to a network of independently owned and Ethan Allen owned design
centers as well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the
wholesale sale and shipment of our product to all retail design centers,
including those owned by Ethan Allen.
Wholesale profitability includes (i) the wholesale gross margin,
which represents the difference between the wholesale sales price and the cost
associated with manufacturing and/or sourcing the related product, and (ii) other
operating costs associated with wholesale segment activities.
The
retail segment sells home furnishings and accessories to consumers through a
network of Company owned design centers.
Retail revenue is generated upon the retail sale and delivery of our
product to our customers. Retail
profitability includes (i) the retail gross margin, which represents the
difference between the retail sales price and the cost of goods purchased from
the wholesale segment, and (ii) other operating costs associated with
retail segment activities.
Inter-segment
eliminations result, primarily, from the wholesale sale of inventory to the
retail segment, including the related profit margin.
We
evaluate performance of the respective segments based upon revenues and
operating income. While the manner in which our home furnishings and
accessories are marketed and sold is consistent, the nature of the underlying
recorded sales (i.e. wholesale versus retail) and the specific services that
each operating segment provides (i.e. wholesale manufacturing, sourcing, and
distribution versus retail selling) are different. Within the wholesale
13
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
segment,
we maintain revenue information according to each respective product line (i.e.
case goods, upholstery, or home accessories and other).
A
breakdown of wholesale sales by these product lines for the three months ended September 30,
2008 and 2007 is provided as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Case Goods
|
|
41
|
%
|
47
|
%
|
Upholstered Products
|
|
42
|
|
37
|
|
Home Accessories and Other
|
|
17
|
|
16
|
|
|
|
100
|
%
|
100
|
%
|
Revenue
information by product line is not as easily determined within the retail
segment. However, because wholesale production and sales are matched, for the
most part, to incoming orders, we believe that the allocation of retail sales
by product line would be similar to that of the wholesale segment.
Segment
information for the three months ended September 30, 2008 and 2007 is set forth
as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Net Sales:
|
|
|
|
|
|
Wholesale segment
|
|
$
|
121,295
|
|
$
|
156,323
|
|
Retail segment
|
|
155,870
|
|
182,754
|
|
Elimination of inter-company sales
|
|
(71,324
|
)
|
(90,350
|
)
|
Consolidated Total
|
|
$
|
205,841
|
|
$
|
248,727
|
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
|
Wholesale segment (1)
|
|
$
|
11,885
|
|
$
|
26,780
|
|
Retail segment (2)
|
|
(3,052
|
)
|
899
|
|
Adjustment of inter-company profit (3)
|
|
3,378
|
|
118
|
|
Consolidated Total
|
|
$
|
12,211
|
|
$
|
27,797
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
Wholesale segment
|
|
$
|
1,632
|
|
$
|
2,044
|
|
Retail segment
|
|
9,461
|
|
10,501
|
|
Acquisitions (4) (5)
|
|
375
|
|
96
|
|
Consolidated Total
|
|
$
|
11,468
|
|
$
|
12,641
|
|
|
|
September 30,
|
|
June 30,
|
|
|
|
2008
|
|
2008
|
|
Total Assets
|
|
|
|
|
|
Wholesale segment
|
|
$
|
344,444
|
|
$
|
342,960
|
|
Retail segment
|
|
452,130
|
|
459,842
|
|
Inventory profit elimination(6)
|
|
(37,317
|
)
|
(40,829
|
)
|
Consolidated Total
|
|
$
|
759,257
|
|
$
|
761,973
|
|
14
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
(1)
|
|
Operating income for the
wholesale segment for 2008 includes a pre-tax restructuring and impairment charge
of $0.4 million for the September quarter.
|
(2)
|
|
Operating income for the
retail segment for 2008 includes pre-tax restructuring and impairment net
recovery of $2.0 million for the September quarter.
|
(3)
|
|
Represents the change in
the inventory profit elimination necessary to adjust for the embedded
wholesale profit contained in Ethan Allen-owned design center inventory
existing at the end of the period.
|
(4)
|
|
Amount reflected as
acquisitions for the three months ended September 30, 2008 includes the
purchase of two retail design centers.
|
(5)
|
|
Amount reflected as
acquisitions for 2007 excludes the purchase (for consideration totaling $0.6
million) of a retail design center with an effective (closing) date of
June 30, 2007 and for which funding did not occur until July 2,
2007.
|
(6)
|
|
Represents the embedded
wholesale profit contained in Ethan Allen-owned design center inventory that
has not yet been realized. These profits are realized when the related
inventory is sold.
|
There
were 40 independent retail design centers located outside the United States at September 30,
2008. Approximately 3% to 4% of our net sales were derived from sales to these
retail design centers.
(15) Subsequent Events
None
(16) Recent Accounting Pronouncements
In December 2007, the
FASB issued SFAS No. 141 (revised 2007),
Business
Combinations
(SFAS No. 141(R)), which replaces SFAS No. 141.
SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
controlling interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No. 141(R) is
to be applied prospectively to business combinations for which the acquisition
date is on or after an entitys fiscal year that begins after December 15,
2008 (July 1, 2009 for the Company). The impact of this statement on the
Companys financial position, results of operations and cash flows will be
dependent upon the terms, conditions and details of such acquisitions.
In February 2008, the
FASB issued FASB Staff Position 157-2,
Effective
Date of FASB Statement No. 157
, which delays the effective
date of SFAS No. 157 to July 1, 2009 for us, for all nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). We believe the adoption
of the delayed items of SFAS No. 157 will not have a material impact on
our financial statements.
(17) Financial Information About the Parent,
the Issuer and the Guarantors
On September 27, 2005,
Global (the Issuer) issued $200 million aggregate principal amount of Senior
Notes which have been guaranteed on a senior basis by Interiors (the Parent),
and other wholly owned subsidiaries of the Issuer and the Parent, including
Ethan Allen Retail, Inc., Ethan Allen Operations, Inc., Ethan Allen
Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The
subsidiary guarantors (other than the Parent) are collectively called the Guarantors. The guarantees of the Guarantors are
unsecured. All of the guarantees are
full, unconditional and joint and several and the Issuer and each of the
Guarantors are 100% owned by the Parent. Ethan Allen (UK) Ltd., KEA International
Inc. (which was legally dissolved in January 2007), Northeast Consolidated, Inc.
(which was legally dissolved in June 2007), Riverside Water Works, Inc.
(which was legally dissolved in June 2007), and our other subsidiaries
which are not guarantors are called the Non-Guarantors.
15
Table of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
The following tables set
forth the condensed consolidating balance sheets as of September 30, 2008
and June 30, 2008, the condensed consolidating statements of operations
for the three months ended September 30, 2008 and 2007, and the condensed
consolidating statements of cash flows for the three months ended September 30,
2008 and 2007 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.
16
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
(In
thousands)
September 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
76,960
|
|
$
|
2,957
|
|
$
|
|
|
$
|
|
|
$
|
79,917
|
|
Accounts receivable, net
|
|
|
|
10,947
|
|
602
|
|
|
|
|
|
11,549
|
|
Inventories
|
|
|
|
|
|
224,812
|
|
|
|
(37,317
|
)
|
187,495
|
|
Prepaid expenses and other current assets
|
|
|
|
11,823
|
|
14,381
|
|
|
|
|
|
26,204
|
|
Intercompany
|
|
|
|
732,361
|
|
212,547
|
|
|
|
(944,908
|
)
|
|
|
Total current assets
|
|
|
|
832,091
|
|
455,299
|
|
|
|
(982,225
|
)
|
305,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
12,979
|
|
342,057
|
|
|
|
|
|
355,036
|
|
Goodwill and other intangible assets
|
|
|
|
37,905
|
|
56,728
|
|
|
|
|
|
94,633
|
|
Other assets
|
|
|
|
3,509
|
|
914
|
|
|
|
|
|
4,423
|
|
Investment in affiliated companies
|
|
670,584
|
|
106,157
|
|
|
|
|
|
(776,741
|
)
|
|
|
Total assets
|
|
$
|
670,584
|
|
$
|
992,641
|
|
$
|
854,998
|
|
$
|
|
|
$
|
(1,758,966
|
)
|
$
|
759,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
|
|
$
|
|
|
$
|
41
|
|
$
|
|
|
$
|
|
|
$
|
41
|
|
Customer deposits
|
|
|
|
|
|
42,640
|
|
|
|
|
|
42,640
|
|
Accounts payable
|
|
|
|
10,546
|
|
15,348
|
|
|
|
|
|
25,894
|
|
Accrued expenses and other current
liabilities
|
|
7,316
|
|
44,329
|
|
16,411
|
|
|
|
|
|
68,056
|
|
Intercompany
|
|
289,590
|
|
597
|
|
654,721
|
|
|
|
(944,908
|
)
|
|
|
Total current liabilities
|
|
296,906
|
|
55,472
|
|
729,161
|
|
|
|
(944,908
|
)
|
136,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
198,877
|
|
4,141
|
|
|
|
|
|
203,018
|
|
Other long-term liabilities
|
|
|
|
7,781
|
|
12,880
|
|
|
|
|
|
20,661
|
|
Deferred income taxes
|
|
|
|
22,948
|
|
|
|
|
|
|
|
22,948
|
|
Total liabilities
|
|
296,906
|
|
285,078
|
|
746,182
|
|
|
|
(944,908
|
)
|
383,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
373,678
|
|
707,563
|
|
108,816
|
|
|
|
(814,058
|
)
|
375,999
|
|
Total liabilities and shareholders equity
|
|
$
|
670,584
|
|
$
|
992,641
|
|
$
|
854,998
|
|
$
|
|
|
$
|
(1,758,966
|
)
|
$
|
759,257
|
|
17
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
(In
thousands)
June 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
71,117
|
|
$
|
3,259
|
|
$
|
|
|
$
|
|
|
$
|
74,376
|
|
Accounts receivable, net
|
|
|
|
11,937
|
|
735
|
|
|
|
|
|
12,672
|
|
Inventories
|
|
|
|
|
|
227,094
|
|
|
|
(40,829
|
)
|
186,265
|
|
Prepaid expenses and other current assets
|
|
|
|
15,355
|
|
21,510
|
|
|
|
|
|
36,865
|
|
Intercompany receivables
|
|
|
|
713,984
|
|
209,471
|
|
|
|
(923,455
|
)
|
0
|
|
Total current assets
|
|
|
|
812,393
|
|
462,069
|
|
|
|
(964,284
|
)
|
310,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
13,186
|
|
337,246
|
|
|
|
|
|
350,432
|
|
Goodwill and other intangible assets
|
|
|
|
37,905
|
|
58,918
|
|
|
|
|
|
96,823
|
|
Other assets
|
|
|
|
3,604
|
|
936
|
|
|
|
|
|
4,540
|
|
Investment in affiliated companies
|
|
662,726
|
|
117,368
|
|
|
|
|
|
(780,094
|
)
|
|
|
Total assets
|
|
$
|
662,726
|
|
$
|
984,456
|
|
$
|
859,169
|
|
$
|
|
|
$
|
(1,744,378
|
)
|
$
|
761,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
41
|
|
|
|
|
|
41
|
|
Customer deposits
|
|
|
|
|
|
47,297
|
|
|
|
|
|
47,297
|
|
Accounts payable
|
|
|
|
9,785
|
|
16,659
|
|
|
|
|
|
26,444
|
|
Accrued expenses and other current
liabilities
|
|
6,438
|
|
36,885
|
|
18,397
|
|
|
|
|
|
61,720
|
|
Intercompany payables
|
|
283,216
|
|
597
|
|
639,601
|
|
41
|
|
(923,455
|
)
|
|
|
Total current liabilities
|
|
289,654
|
|
47,267
|
|
721,995
|
|
41
|
|
(923,455
|
)
|
135,502
|
|
Long-term debt
|
|
|
|
198,837
|
|
4,151
|
|
|
|
|
|
202,988
|
|
Other long-term liabilities
|
|
|
|
7,819
|
|
12,564
|
|
|
|
|
|
20,383
|
|
Deferred income taxes
|
|
|
|
27,327
|
|
|
|
|
|
|
|
27,327
|
|
Total liabilities
|
|
289,654
|
|
281,250
|
|
738,710
|
|
41
|
|
(923,455
|
)
|
386,200
|
|
Shareholders equity
|
|
373,072
|
|
703,206
|
|
120,459
|
|
(41
|
)
|
(820,923
|
)
|
375,773
|
|
Total liabilities and shareholders equity
|
|
$
|
662,726
|
|
$
|
984,456
|
|
$
|
859,169
|
|
$
|
|
|
$
|
(1,744,378
|
)
|
$
|
761,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Table of
Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
Three
Months Ended September 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
$
|
121,596
|
|
$
|
214,880
|
|
$
|
|
|
$
|
(130,635
|
)
|
$
|
205,841
|
|
Cost of sales
|
|
|
|
88,405
|
|
139,666
|
|
|
|
(134,171
|
)
|
93,900
|
|
Gross profit
|
|
|
|
33,191
|
|
75,214
|
|
|
|
3,536
|
|
111,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
41
|
|
13,291
|
|
88,028
|
|
|
|
|
|
101,360
|
|
Restructuring and impairment charge, (credit) net
|
|
|
|
|
|
(1,630
|
)
|
|
|
|
|
(1,630
|
)
|
Total operating expenses
|
|
41
|
|
3,291
|
|
86,398
|
|
|
|
|
|
99,730
|
|
Operating income (loss)
|
|
(41
|
)
|
19,900
|
|
(11,184
|
)
|
|
|
3,536
|
|
12,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other miscellaneous income, net
|
|
7,463
|
|
(10,136
|
)
|
8
|
|
|
|
3,765
|
|
1,100
|
|
Interest and other related financing costs
|
|
|
|
2,825
|
|
76
|
|
|
|
|
|
2,901
|
|
Income before income tax expense
|
|
7,422
|
|
6,939
|
|
(11,252
|
)
|
|
|
7,301
|
|
10,410
|
|
Income tax expense
|
|
|
|
2,988
|
|
|
|
|
|
|
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,422
|
|
$
|
3,951
|
|
$
|
(11,252
|
)
|
$
|
|
|
$
|
7,301
|
|
$
|
7,422
|
|
19
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In
thousands)
Three Months Ended September 30, 2007
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
$
|
156,547
|
|
$
|
250,964
|
|
$
|
|
|
$
|
(158,784
|
)
|
$
|
248,727
|
|
Cost of sales
|
|
|
|
110,533
|
|
163,641
|
|
|
|
(158,904
|
)
|
115,270
|
|
Gross profit
|
|
|
|
46,014
|
|
87,323
|
|
|
|
120
|
|
133,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
expenses
|
|
41
|
|
11,004
|
|
94,615
|
|
|
|
|
|
105,660
|
|
Restructuring and impairment charge, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
41
|
|
11,004
|
|
94,615
|
|
|
|
|
|
105,660
|
|
Operating income (loss)
|
|
(41
|
)
|
35,010
|
|
(7,292
|
)
|
|
|
120
|
|
27,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other miscellaneous income,
net
|
|
17,545
|
|
(4,456
|
)
|
414
|
|
|
|
(10,581
|
)
|
2,922
|
|
Interest and other related financing costs
|
|
|
|
2,859
|
|
76
|
|
|
|
|
|
2,935
|
|
Income before income tax expense
|
|
17,504
|
|
27,695
|
|
(6,954
|
)
|
|
|
(10,461
|
)
|
27,784
|
|
Income tax expense
|
|
|
|
10,244
|
|
36
|
|
|
|
|
|
10,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
17,504
|
|
$
|
17,451
|
|
$
|
(6,990
|
)
|
$
|
|
|
$
|
(10,461
|
)
|
$
|
17,504
|
|
20
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(In
thousands)
Three Months Ended September 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities
|
|
$
|
6,329
|
|
$
|
6,500
|
|
$
|
5,246
|
|
$
|
|
|
$
|
|
|
$
|
18,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(644
|
)
|
(10,449
|
)
|
|
|
|
|
(11,093
|
)
|
Acquisitions
|
|
|
|
|
|
(375
|
)
|
|
|
|
|
(375
|
)
|
Proceeds from the disposal of property,
plant and equipment
|
|
|
|
19
|
|
5,710
|
|
|
|
|
|
5,729
|
|
Other
|
|
|
|
(32
|
)
|
(217
|
)
|
|
|
|
|
(249
|
)
|
Net cash used in investing activities
|
|
|
|
(657
|
)
|
(5,331
|
)
|
|
|
|
|
(5,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
(10
|
)
|
Purchases and other retirements of company
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
2
|
|
|
|
|
|
|
|
|
|
2
|
|
Excess tax benefits from share-based
payment arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
(6,331
|
)
|
|
|
|
|
|
|
|
|
(6,331
|
)
|
Net cash provided by (used in) financing
activities
|
|
(6,329
|
)
|
|
|
(10
|
)
|
|
|
|
|
(6,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
|
5,843
|
|
(302
|
)
|
|
|
|
|
(5,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of
period
|
|
|
|
71,117
|
|
3,259
|
|
|
|
|
|
74,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
|
|
$
|
76,960
|
|
$
|
2,957
|
|
$
|
|
|
$
|
|
|
$
|
79,917
|
|
21
Table of
Contents
ETHAN ALLEN INTERIORS INC. AND
SUBSIDIARIES
Notes to Consolidated Financial
Statements (Unaudited)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
(In thousands)
Three
Months Ended September 30, 2007
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
49,979
|
|
$
|
(14,216
|
)
|
$
|
5,687
|
|
$
|
|
|
$
|
|
|
$
|
41,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(1,294
|
)
|
(11,251
|
)
|
|
|
|
|
(12,545
|
)
|
Acquisitions
|
|
|
|
|
|
(705
|
)
|
|
|
|
|
(705
|
)
|
Proceeds from the disposal of property, plant and equipment
|
|
|
|
|
|
5,063
|
|
|
|
|
|
5,063
|
|
Other
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Net cash used in investing activities
|
|
|
|
(1,288
|
)
|
(6,893
|
)
|
|
|
|
|
(8,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
(9
|
)
|
Purchases and other retirements of company stock
|
|
(44,101
|
)
|
|
|
|
|
|
|
|
|
(44,101
|
)
|
Proceeds from issuance of common stock
|
|
307
|
|
|
|
|
|
|
|
|
|
307
|
|
Excess tax benefits from share-based payment arrangements
|
|
|
|
2,081
|
|
|
|
|
|
|
|
2,081
|
|
Dividends paid
|
|
(6,185
|
)
|
|
|
|
|
|
|
|
|
(6,185
|
)
|
Net cash provided by (used in) financing activities
|
|
(49,979
|
)
|
2,081
|
|
(9
|
)
|
|
|
|
|
(47,907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
243
|
|
|
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
|
(13,423
|
)
|
(972
|
)
|
|
|
|
|
(14,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
|
142,253
|
|
5,626
|
|
|
|
|
|
147,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
|
|
$
|
128,830
|
|
$
|
4,654
|
|
$
|
|
|
$
|
|
|
$
|
133,484
|
|
22
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion of financial condition and results of operations should be
read in conjunction with (i) our Consolidated Financial Statements, and
notes thereto, as set forth in this Quarterly Report on Form 10-Q and (ii) our
Annual Report on Form 10-K for the year ended June 30, 2008.
Forward-Looking
Statements
Managements
discussion and analysis of financial condition and results of operations and
other sections of this Quarterly Report contain forward-looking statements
relating to our future results. Such forward-looking statements are identified
by use of forward-looking words such as anticipates, believes, plans, estimates,
expects, and intends or words or phrases of similar expression. These
forward-looking statements are subject to management decisions and various
assumptions, risks and uncertainties, including, but not limited to: the
effects of terrorist attacks or conflicts or wars involving the United States
or its allies or trading partners; the effects of labor strikes; weather
conditions that may affect sales; volatility in fuel, utility, transportation
and security costs; changes in global or regional political or economic
conditions, including changes in governmental and central bank policies;
changes in business conditions in the furniture industry, including changes in
consumer spending patterns and demand for home furnishings; effects of our
brand awareness and marketing programs, including changes in demand for our
existing and new products; our ability to locate new design center sites and/or
negotiate favorable lease terms for additional design centers or for the
expansion of existing design centers; competitive factors, including changes in
products or marketing efforts of others; pricing pressures; fluctuations in
interest rates and the cost, availability and quality of raw materials; those
matters discussed in Items 1A and 7A of our Annual Report on Form 10-K for
the year ended June 30, 2008 and in our SEC filings; and our future
decisions. Accordingly, actual circumstances and results could differ
materially from those contemplated by the forward-looking statements.
Critical
Accounting Policies
There
have been no material changes with respect to the Companys critical accounting
policies from those disclosed in its 2008 Annual Report on Form 10-K filed
with the SEC on August 22, 2008
.
Results of Operations
Our
revenues are comprised of (i) wholesale sales to independently owned and
Company-owned retail design centers and (ii) retail sales of Company-owned
design centers. See Note 14 to our
Consolidated Financial Statements for the three months ended September 30,
2008 and 2007.
The
components of consolidated revenue and operating income were as follows (in
millions):
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Revenue:
|
|
|
|
|
|
Wholesale segment
|
|
$
|
121.3
|
|
$
|
156.3
|
|
Retail segment
|
|
155.9
|
|
182.8
|
|
Elimination of inter-company sales
|
|
(71.3
|
)
|
(90.4
|
)
|
Consolidated Revenue
|
|
$
|
205.8
|
|
$
|
248.7
|
|
23
Table of Contents
|
|
Three Months Ended
September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating Income:
|
|
|
|
|
|
Wholesale segment (1)
|
|
$
|
11.9
|
|
$
|
26.8
|
|
Retail segment (2)
|
|
(3.1
|
)
|
0.9
|
|
Adjustment of inter-company profit (3)
|
|
3.4
|
|
0.1
|
|
Consolidated Operating Income
|
|
$
|
12.2
|
|
$
|
27.8
|
|
(1)
|
|
Operating income for the
wholesale segment for 2008 includes a pre-tax restructuring and impairment
charge of $0.4 million for the September quarter.
|
(2)
|
|
Operating income for the
retail segment for 2008 includes a pre-tax restructuring and impairment net
recovery of $2.0 million for the September quarter.
|
(3)
|
|
Represents the change in
the inventory profit elimination necessary to adjust for the wholesale profit
contained in Ethan Allen-owned design center inventory existing at the end of
the period.
|
Quarter Ended September 30, 2008
Compared to Quarter Ended September 30, 2007
Consolidated
revenue
for the three
months ended September 30, 2008 decreased by $42.9 million, or 17.2%, to
$205.8 million, from $248.7 million for the three months ended September 30,
2007. During the quarter, sales were
negatively affected by a weak retail environment for home furnishings which we
believe is due to a continued weakening of consumer confidence with current
economic conditions in the U.S. and abroad.
We believe these factors were partially offset by (i) our ongoing
efforts to reposition the retail network, (ii) new product introductions,
and (iii) an increase in the continued use of national television as an
advertising medium. Net sales for the period largely reflect the delivery of
product associated with booked orders and backlog existing as of the end of the
preceding quarter. The Companys sales
decrease is primarily the result of lower volume, not lower prices. By maintaining our everyday best price
policy, we believe we have avoided the cyclicality associated with discount
sales and preserved decent profitability during these challenging times.
Wholesale revenue
for the first quarter of fiscal 2008 decreased by $35.0 million, or
22.4%, to $121.3 million from $156.3 million in the prior year comparable
period. The quarter-over-quarter
decrease was primarily attributable to a decline in the incoming order rate due
to a continued soft retail environment for home furnishings noted throughout
the current period. In addition, there
were 20 fewer independent retail design centers, which decreased to 132 from
152, including eight locations transferred in to the companys Retail division during
the year. There was one more shipping
day this quarter.
Retail
revenue
from Ethan
Allen-owned design centers for the three months ended September 30, 2008
decreased by $26.9 million, or 14.7%, to $155.9 million from $182.8 million for
the three months ended September 30, 2007.
We believe the decrease in retail sales by Ethan Allen-owned design
centers is due to the same soft market conditions experienced by the wholesale
segment, as evidenced by a 19% decrease in comparable store sales. Partially
offsetting this was a $4.0 million increase in new/closed store sales, and a
net increase in the number of Ethan Allen-owned design centers to 160 as of September 30,
2008 as compared to 159 as of September 30, 2007. During that twelve month period, we acquired
eight design centers from independent retailers and opened fourteen design
centers (nine of which were relocations), and closed twelve design centers.
Comparable
design centers are those which have been operating for at least 15 months. Minimal net sales, derived from the delivery
of customer ordered product, are generated during the first three months of
operations of newly opened (including relocated) design centers. Design centers
acquired by us from independent retailers are included in comparable design
centers sales in their 13th full month of Ethan Allen-owned operations.
Quarter-over-quarter,
written business of Ethan Allen-owned design centers decreased 24.3% while
comparable design centers written business decreased 27.7%. Over that same period, wholesale orders decreased
25.6%. Both
24
Table of Contents
retail
and wholesale written business reflects the softer retail environment for home
furnishings noted throughout the period.
We believe this has been offset, to some degree, by (i) our
continued efforts to reposition the retail network, (ii) product
introductions, and (iii) an increase in the continued use of national
television as an advertising medium. During the quarter, we also believe we
benefitted from the continued access to credit for our clients through our
third party consumer credit program.
We have made considerable
investment within the retail network to strengthen the level of service,
professionalism, interior design competence, efficiency, and effectiveness of
the retail design center personnel. The
implementation of the team concept has resulted in the development of over
280 interior design teams. We believe
that this team structure will help us continue to improve the customer service
experience.
Gross profit
decreased during the quarter to $111.9 million from $133.5 million in
the prior year comparable quarter. The
$21.5 million, or 16.1%, decrease in gross profit was primarily attributable to
(i) the reduction in net sales of 17.2%, with an overall decrease in
shipments in both market segments, and (ii) lower margin percentages
within the wholesale segment due to under absorbing of plant overhead costs on
the lower production volume. These
factors were partially offset by (i) an improved margin percentage in our
retail segment and (ii) a favorable shift in sales mix with retail sales
representing a higher proportionate share of total sales in the current quarter
(76%) compared to the prior year period (73%).
Consolidated gross margin increased to 54.4% for the first quarter of
fiscal 2009 from 53.7% in the prior year quarter as a result, primarily, of the
factors set forth above.
Operating profit
, the elements of which are discussed in greater detail below, was
impacted by the following items during the three months ended September 30,
2008 and 2007:
On
January 10, 2008, we announced a plan to consolidate the operations of
certain company owned retail design centers and retail service centers. In
connection with this initiative, we have permanently ceased operations at
eleven design centers and six retail service centers which, for the most part,
were consolidated into other existing operations. We also implemented our design team concept
across the Retail division at the end of fiscal 2008. These decisions resulted in a reduction in
headcount of approximately 400 employees, with the reduction in headcount
occurring mostly during the third and fourth quarters of fiscal 2008. Additionally, other actions taken during
fiscal 2008 were not included in the restructuring plan. Altogether, there were
more than 500 fewer associates in our Retail business by the end of fiscal
2008. In the first quarter of fiscal 2009, a $1.6 million restructuring and
impairment net gain was recorded. Of
this amount, $4.2 million was a realized gain on the sale of property
classified as held for sale and was partially offset by $2.2 million in lease
termination costs and adjustments for expected charges on leased properties no
longer being used. Since the plan was
announced, we have recorded pre-tax restructuring and impairment charges
totaling $4.8 million, including $0.9 million in employee severance and other
payroll and benefit costs, $5.3 million in lease termination and other exit
costs, and a benefit of $1.4 million on long-lived assets. We do not anticipate any additional new
charges related to this retail restructuring, however, the estimated present value
of future lease payments with terms ranging from less than one to seven years,
and one ground lease with 25 years remaining are included in the balance at September 30,
2008 and contain estimates that will likely require adjustment in the
future. In addition to the retail
charges, $0.4 million was recorded in the quarter to update the fair value of a
wholesale plant site held for sale.
Operating expenses
decreased $5.9 million, or 5.6%, to $99.7 million, or 48.5% of sales,
in the current quarter from $105.7 million, or 42.5% of sales, in the prior
year quarter. Decreases in salary related
costs were experienced due to the reduced number of employees. Advertising expenses were down $2.7 million
despite a 32% increase in national TV advertising. These reductions were partly offset by an
incremental charge of $4.6 million due to the implementation of the team
concept in the retail division whereby design associates are paid a base salary
with an opportunity to earn a bonus.
This caused a temporary overlap of expenses.
Consolidated operating income
for the three month period ended September 30,
2008 totaled $12.2 million, or 5.9% of sales, as compared to $27.8 million, or
11.2% of sales, for the three months ended September 30, 2007. This
25
Table of Contents
decrease
of $15.6 million is due to a decrease in gross profit mostly due to reduced
sales, partly offset by a decrease in period over period operating expenses,
both of which were discussed previously.
Wholesale operating income
for the three months ended September 30,
2008 totaled $11.9 million, or 9.8% of sales, as compared to $26.8 million, or
17.1% of sales, in the prior year comparable quarter. The decrease of $14.9
million was primarily attributable to (i) a decrease in sales volume, (ii) higher
unabsorbed costs in our manufacturing plants due to lower production volumes.
Retail operating income
decreased $4.0 million to a loss of $3.1
million, or 2.0% of sales, for the first quarter of fiscal 2009 from income of
$0.9 million, or 0.5% of sales, for the first quarter of fiscal 2008. The decrease in retail operating income
generated by Ethan Allen-owned design centers was primarily due to reduced
sales attributed to the weak retail environment for home furnishings.
Interest
and other miscellaneous income, net
decreased $1.8 million from the prior year comparable quarter. The decrease was due, primarily to a decrease
in investment income resulting from lower cash and cash equivalent balances and
lower rates of interest during the current period, and by gains recorded in
connection with the sale of selected real estate assets in the prior year.
Interest
and other related financing costs
amounted to $2.9 million in both the current and prior year
periods. This amount consists,
primarily, of interest expense incurred in connection with our issuance of
senior unsecured debt in September 2005.
Income tax
expense
for the three
months ended September 30, 2008 totaled $3.0 million as compared to $10.3
million for the three months ended September 30, 2007. Our effective tax rate for the current
quarter was 28.7% compared to 37.0% in the prior year quarter. The reduction in effective tax rate for the
current quarter was primarily due to a one time adjustment of $0.7 million made
during the current quarter.
Net income
for the three months ended September 30, 2008, was $7.4 million
as compared to $17.5 million in the prior year comparable period. Net income per diluted share totaled $0.26 in
the current quarter and $0.57 in the prior year quarter.
Liquidity and Capital Resources
At
September 30, 2008, we held cash and cash equivalents of $79.9
million. Our principal sources of
liquidity include cash and cash equivalents, cash flow from operations, and
borrowings.
Global
capital markets have recently been disrupted and volatile. The cost and availability of funding has been
and may continue to be adversely affected by illiquid credit markets. Some lenders have reduced or, in some cases,
ceased to provide funding to borrowers.
However, our lenders have not indicated to us that they would not
continue to provide funding to us or not honor or be able to fully perform
their obligations under the credit facility.
Continued turbulence in the financial markets, however, could adversely
affect the cost and availability of financing to us in the future.
We maintain a $200 million
revolving credit facility with a group of lenders that expires in July 2010. At September 30, 2008, we had no
revolving loans, and $12.5 million in trade and standby letters of credit
outstanding under the agreement. This facility includes an accordion feature
which provides for an additional $100.0 million of liquidity, if needed, as
well as sub-facilities for trade and standby letters of credit of $100.0
million and swingline loans of $5.0 million.
The credit facility contains various covenants which may limit our ability
to incur debt; engage in mergers and consolidations; make restricted payments;
sell certain assets; make investments; and issue stock. We are also required to
meet certain financial covenants including a fixed charge coverage ratio, which
shall not be less than 3.00 to 1 for any period of four consecutive fiscal
quarters ended on or after June 30, 2005, and a leverage ratio,
26
Table
of Contents
which shall not be greater
than 3.00 to 1 at any time. As of September 30,
2008, we had satisfactorily complied with these covenants. If unfavorable business conditions persist,
we may not comply with one or more of these covenants in the future. To address
this possibility, we are discussing with our group of lenders possible
amendments or changes to the facility.
As noted above, our lenders have not indicated to us that they would not
continue to provide funding to us under the credit facility. It is possible, however, that any amendments
to the credit facility could result in a higher cost of borrowing for us. We believe that we will continue to have
adequate liquidity to meet our current needs.
In
addition, on September 27, 2005, we completed a private offering of $200.0
million in ten-year senior unsecured notes due 2015 (the Senior Notes). The
Senior Notes were offered by Ethan Allen Global, Inc. (Global), a
wholly-owned subsidiary of the Company, and have an annual coupon rate of
5.375%. We have used the net proceeds of
$198.4 million to expand our retail network, invest in our manufacturing and
logistics operations, and for other general corporate purposes.
A
summary of net cash provided by (used in) operating, investing, and financing
activities for the three month periods ended September 30, 2008 and 2007
is provided below (in millions):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
Operating Activities
|
|
|
|
|
|
Net income plus depreciation and
amortization
|
|
$
|
13.7
|
|
$
|
23.4
|
|
Working capital
|
|
9.0
|
|
11.2
|
|
Excess tax benefits from share-based
payment arrangements
|
|
|
|
(2.1
|
)
|
Other (non-cash items, long-term assets and
liabilities)
|
|
(4.6
|
)
|
9.0
|
|
Total provided by operating activities
|
|
$
|
18.1
|
|
$
|
41.5
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(11.1
|
)
|
$
|
(12.5
|
)
|
Acquisitions
|
|
(0.4
|
)
|
(0.7
|
)
|
Asset sales
|
|
5.7
|
|
5.0
|
|
Other
|
|
(0.2
|
)
|
|
|
Total provided by (used in) investing
activities
|
|
$
|
(6.0
|
)
|
$
|
(8.2
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Issuances of common stock
|
|
|
|
0.3
|
|
Purchases of company stock
|
|
|
|
(44.1
|
)
|
Payment of dividends
|
|
(6.3
|
)
|
(6.2
|
)
|
Excess tax benefits from share-based
payment arrangements
|
|
|
|
2.1
|
|
Total provided by (used in) financing
activities
|
|
$
|
(6.3
|
)
|
$
|
(47.9
|
)
|
Operating Activities
As
compared to the same period in fiscal year 2008, cash provided by operating
activities decreased $23.4 million, primarily due to a $10.1 million decrease
in net income, and a lower year to date benefit from a decrease in working
capital (accounts receivable, inventories, prepaid and other current assets,
customer deposits, payables, and accrued expenses and other current
liabilities) largely arising from a decrease in customer deposits liability.
Investing Activities
As
compared to the same period in fiscal year 2008, cash used in investing
activities decreased $2.2 million during the three months ended September 30,
2008 due, primarily, to a reduction in cash utilized to fund capital
expenditures and acquisitions. We
anticipate that cash from operations will be sufficient to fund future capital
expenditures.
27
Table of Contents
Financing Activities
As
compared to the same period in fiscal year 2008, cash used in financing
activities decreased $41.6 million during the three months ended September 30,
2008, primarily as a result of a decrease in payments for the acquisition of
treasury stock. On July 22, 2008,
we declared a dividend of $0.25 per common share, payable on October 27,
2008, to shareholders of record as of October 10, 2008. We expect to continue to declare quarterly
dividends for the foreseeable future.
As
of September 30, 2008, our outstanding debt totaled $203.0 million, the current
and long-term portions of which amounted to less than $0.1 million and $203.0
million, respectively. The aggregate
scheduled maturities of long-term debt for each of the next five fiscal years
are: less than $0.1 million in each of fiscal 2009 and 2010, $3.9 million in
fiscal 2011 and less than $0.1 million in fiscal 2012. The balance of our long-term debt ($199.1
million) matures in fiscal years 2013 and thereafter.
We
had no revolving loans outstanding under the credit facility as of September 30,
2008, and stand-by letters of credit outstanding under the facility at that
date totaled $12.5 million. Remaining
available borrowing capacity under the facility was $187.5 million at September 30,
2008.
There has been no material
change to the amount or timing of cash payments related to our outstanding
contractual obligations as set forth in Part II, Item 7
Managements Discussion and Analysis of Financial
Condition and Results of Operation
of our Annual Report on Form 10-K
for the year ended June 30, 2008 as filed with the Securities and Exchange
Commission on August 22, 2008.
We
believe that our cash flow from operations, together with our other available
sources of liquidity, will be adequate to make all required payments of
principal and interest on our debt, to permit anticipated capital expenditures,
and to fund working capital and other cash requirements. As of September 30, 2008, we had working
capital of $168.5 million and a current ratio of 2.23 to 1.
In
addition to using available cash to fund changes in working capital, necessary
capital expenditures, acquisition activity, the repayment of debt, and the
payment of dividends, we have 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. All of
our common stock repurchases and retirements are recorded as treasury stock and
result in a reduction of shareholders equity.
During
the three months ended September 30, 2008 and 2007, we repurchased and/or
retired the following shares of our common stock:
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2008
|
|
2007
(1)(2
)
|
|
Common shares repurchased
|
|
|
|
1,144,000
|
|
Cost to repurchase common shares
|
|
|
|
$
|
38,268,917
|
|
Average price per share
|
|
|
|
$
|
33.45
|
|
(1)
|
|
Repurchase activity for the
three months ended September 30, 2007 excludes $3,436,230 in common
stock repurchases with a June 2007 trade date and a July 2007
settlement date.
|
(2)
|
|
During August 2007, we
also retired 661,688 shares of common stock tendered upon the exercise of
outstanding employee stock options (592,861 to cover share exercise and
68,827 to cover related employee tax withholding liabilities). The total
value of such shares on the date redeemed was $23,033,359, representing an
average price per share of $34.81.
|
For
each of the periods presented above, we funded our purchases of treasury stock
with existing cash on hand and cash generated through current period
operations. On November 13, 2007,
the Board of Directors increased the then
28
Table of Contents
remaining
share repurchase authorization to 2,000,000 shares. As of September 30, 2008, we had a
remaining Board authorization to repurchase 1,567,669 shares.
Off-Balance
Sheet Arrangements and Other Commitments, Contingencies and Contractual
Obligations
Except
as indicated below, we do not utilize or employ any off-balance sheet
arrangements, including special-purpose entities, in operating our
business. As such, we do not maintain
any (i) retained or contingent interests, (ii) derivative instruments
(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.
In
connection with the issuance of the Senior Notes, Global, in July and August 2005,
entered into six separate forward contracts to hedge the risk-free interest
rate associated with $108.0 million of the related debt in order to mitigate
the negative impact of interest rate fluctuations on earnings, cash flows and
equity. The forward contracts were entered into with a major banking
institution thereby mitigating the risk of credit loss. Upon issuance of the
Senior Notes in September 2005, the related forward contracts were
settled. At the present time we have no current plans to engage in further
hedging activities.
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. Details of
those arrangements for which we act as guarantor or obligor are provided below.
Retailer-Related Guarantees
Independent Retailer Credit
Facility
We
have obligated ourselves, on behalf of one of our independent retailers, with
respect to a $1.5 million credit facility (the Credit Facility) comprised of
a $1.1 million revolving line of credit and a $0.4 million term loan. This
obligation requires us, in the event of the retailers default under the Credit
Facility, to repurchase the retailers inventory, applying such purchase price
to the retailers outstanding indebtedness under the Credit Facility. Our
obligation remains in effect for the life of the term loan. The original agreement, which expired in April 2008,
was replaced with a new agreement with the same terms and conditions which
expires in December 2008. The maximum potential amount of future payments
(undiscounted) that we could be required to make under this obligation is
limited to the amount outstanding under the Credit Facility at the time of
default (subject to pre-determined lending limits based on the value of the
underlying inventory) and, as such, is not an estimate of future cash
flows. No specific recourse or
collateral provisions exist that would enable recovery of any portion of
amounts paid under this obligation, except to the extent that we maintain the
right to take title to the repurchased inventory. We anticipate that the
repurchased inventory could subsequently be sold through our retail design
center network.
As
of September 30, 2008, the amount outstanding under the Credit Facility
totaled approximately $1.3 million, of which $1.0 million was outstanding under
the revolving credit line and $0.3 million under the term loan. Based on the underlying creditworthiness of
the respective retailer, we believe this obligation will expire without
requiring funding by us. However, in accordance with the provisions of FASB
Interpretation No. 45,
Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
, a liability has been
established to reflect our non-contingent obligation under this arrangement as
a result of modifications made to the Credit Facility subsequent to January 1,
2003. As of September 30, 2008, the
carrying amount of such liability is less than $50,000.
Ethan Allen Consumer Credit
Program
The terms and conditions of
our consumer credit program, which is financed and administered by a
third-party financial institution on a non-recourse basis to Ethan Allen, are
set forth in an agreement between us and that
29
Table of Contents
financial service provider
(the Program Agreement). 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. Our obligation remains in effect for the
term of the Program Agreement which expires in July 2012. While the
maximum potential amount of future payments (undiscounted) that we could be
required to make under this obligation is indeterminable, recourse provisions
exist that would enable us to recover, from the independent retailer, any
amount paid or incurred by us related to our performance. Based on the
underlying creditworthiness of our independent retailers, including their
historical ability to satisfactorily perform in connection with the terms of
our consumer credit program, we believe this obligation will expire without
requiring funding by us.
Product Warranties
Our
products, including our case goods, upholstery and home accents, generally
carry explicit product warranties that extend from one to ten years and are
provided based on terms that are generally accepted in the industry. All of our domestic independent retailers are
required to enter into, and perform in accordance with the terms and conditions
of, a warranty service agreement. We record provisions for estimated warranty
and other related costs at time of sale based on historical warranty loss
experience and make periodic adjustments to those provisions to reflect actual
experience. On rare occasion, certain warranty and other related claims involve
matters of dispute that ultimately are resolved by negotiation, arbitration or
litigation. In certain cases, a material
warranty issue may arise which is beyond the scope of our historical experience.
We provide for such warranty issues as they become known and are deemed to be
both probable and estimable. It is reasonably possible that, from time to time,
additional warranty and other related claims could arise from disputes or other
matters beyond the scope of our historical experience. As of September 30
2008, our product warranty liability totaled $1.4 million.
Business
Outlook
Global
capital markets have recently been disrupted and volatile. While we cannot forecast, with any degree of certainty,
changes in the various macro-economic factors that influence the incoming order
rate, we believe that we are well positioned for the next phase of economic
growth based upon our existing business model which includes: (i) an
established brand; (ii) a comprehensive complement of home decorating
solutions; and (iii) a vertically-integrated operating structure.
As
macro-economic factors change, however, it is also possible that our costs
associated with production (including raw materials, labor and utilities),
distribution (including freight and fuel charges), and retail operations
(including compensation, benefits, delivery, warehousing, occupancy, and
advertising expenses) may increase. We
cannot reasonably predict when, or to what extent, such events may occur or
what effect, if any, such events may have on our consolidated financial
condition or results of operations.
The
home furnishings industry remains extremely competitive with respect to both
the sourcing of products and the retail sale of those products. Domestic
manufacturers continue to face pricing pressures as a result of the
manufacturing capabilities developed during recent years in other countries,
specifically within Asia. In response to these pressures, a large number of
U.S. furniture manufacturers and retailers, including us, have increased their
overseas sourcing activities in an attempt to maintain a competitive advantage
and retain market share. At the present time, we domestically manufacture
and/or assemble approximately 60% of our products. We continue to believe that
a balanced approach to product sourcing, which includes the domestic
manufacture of certain product
30
Table of Contents
offerings
coupled with the import of other selected products, provides the greatest
degree of flexibility and is the most effective approach to ensuring that
acceptable levels of quality, service and value are attained.
In
addition, we believe that our retail strategy, which involves (i) a
continued focus on providing a wide array of product solutions and superior
customer service, (ii) the opening of new or relocated design centers in
more prominent locations, while encouraging independent retailers to do the
same, and (iii) the development of a more professional management
structure within our retail network, provides an opportunity to further grow
our business.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
There
have been no material changes to the market risks disclosed in our Annual
Report on Form 10-K for the year ended June 30, 2008 as filed with
the Securities and Exchange Commission on August 22, 2008.
Item 4.
Controls and Procedures
Managements Report on Disclosure Controls and Procedures
Our
management, including the Chairman of the Board and Chief Executive Officer (CEO)
and the Vice President-Finance (VPF), conducted an evaluation of the
effectiveness of disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of the end of the period covered by
this report. Based on such evaluation, the CEO and VPF have concluded that, as
of September 30, 2008, our disclosure controls and procedures were
effective in ensuring that material information relating to us (including our
consolidated subsidiaries), which is required to be disclosed by us in our
periodic reports filed or submitted under the Exchange Act is (i) recorded,
processed, summarized and reported within the time periods specified in the SECs
rules and forms, and (ii) accumulated and communicated to management,
including the CEO and VPF, as appropriate, to allow timely decisions regarding
required disclosure.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial reporting (as such
term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the fiscal quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
31
Table of Contents
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
Except as set forth in Note
9 to the Consolidated Financial Statements included in Part I
Financial Statements
of this report, Item
1, which is incorporated by reference herein, there has been no material change
to the matters discussed in Part I, Item 3 -
Legal Proceedings
in our Annual Report on Form 10-K for
the year ended June 30, 2008 as filed with the Securities and Exchange
Commission on August 22, 2008.
Item 1A.
Risk Factors
There has been no material
change to the matters discussed in Part I, Item 1A
Risk Factors
in our Annual Report on Form 10-K
for the year ended June 30, 2008 as filed with the Securities and Exchange
Commission on August 22, 2008.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
There have been no purchases
made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under
the Exchange Act) of our common stock during the three months ended September 30,
2008, as indicated below:
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 That May Yet
Be Purchased Under
the Plans or Programs
(a)
|
|
July 2008
|
|
|
|
|
|
|
|
1,567,669
|
|
August 2008
|
|
|
|
|
|
|
|
1,567,669
|
|
September 2008
|
|
|
|
|
|
|
|
1,567,669
|
|
Total
|
|
|
|
|
|
|
|
|
|
(a)
|
|
We have 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. In recent years, the Board of Directors has increased the
then remaining share repurchase authorization as follows: from 753,600 shares
to 2,000,000 shares on November 16, 2004; from 691,100 shares to
2,000,000 shares on April 26, 2005; from 393,100 shares to 2,500,000
shares on November 15, 2005; from 1,110,400 shares to 2,500,000 shares
on July 25, 2006; from 707,300 shares to 2,500,000 shares on
July 24, 2007, and from 1,368,000 to 2,000,000 on November 13,
2007.
|
Item 3.
Defaults Upon Senior Securities
Not applicable.
Item 4.
Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5.
Other Information
Not applicable.
Item 6.
Exhibits
Exhibit
Number
|
|
Description
|
31.1
|
|
Rule 13a-14(a)
|
Certification of Principal
Executive Officer
|
31.2
|
|
Rule 13a-14(a)
|
Certification of Principal
Financial Officer
|
32.1
|
|
Section 1350
|
Certification of Principal
Executive Officer
|
32.2
|
|
Section 1350
|
Certification of Principal
Financial Officer
|
32
Table of Contents
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ETHAN
ALLEN INTERIORS INC.
(Registrant)
DATE:
|
November 7, 2008
|
|
BY:
|
/s/ M. Farooq
Kathwari
|
|
Farooq Kathwari
|
|
Chairman, President and
Chief Executive Officer
|
|
(Principal Executive
Officer)
|
DATE:
|
November 7, 2008
|
|
BY:
|
/s/ David R.
Callen
|
|
David R. Callen
|
|
Vice President,
Finance & Treasurer
|
|
(Principal Financial
Officer and Principal Accounting Officer)
|
33
Table of Contents
EXHIBIT
INDEX
Exhibit
Number
|
|
Exhibit
|
31.1
|
|
Rule 13a-14(a) Certification
of Principal Executive Officer
|
31.2
|
|
Rule 13a-14(a) Certification
of Principal Financial Officer
|
32.1
|
|
Section 1350
Certification of Principal Executive Officer
|
32.2
|
|
Section 1350
Certification of Principal Financial Officer
|
Ethan Allen Interiors (NYSE:ETH)
Historical Stock Chart
From May 2024 to Jun 2024
Ethan Allen Interiors (NYSE:ETH)
Historical Stock Chart
From Jun 2023 to Jun 2024