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,
2009
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 has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files);
o
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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
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 October 30, 2009,
there were 28,916,929 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,
2009
|
|
June 30,
2009
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
72,452
|
|
$
|
52,960
|
|
Accounts
receivable, less allowance for doubtful accounts of $1,243 at
September 30, 2009 and $1,362 at June 30, 2009
|
|
13,053
|
|
13,086
|
|
Inventories
(note 4)
|
|
146,661
|
|
156,519
|
|
Prepaid
expenses and other current assets
|
|
12,075
|
|
21,060
|
|
Deferred
income taxes
|
|
7,750
|
|
8,077
|
|
Total
current assets
|
|
251,991
|
|
251,702
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
320,184
|
|
333,599
|
|
Goodwill
and other intangible assets (notes 6 and 7)
|
|
45,128
|
|
45,128
|
|
Other
assets
|
|
21,262
|
|
16,056
|
|
Total
assets
|
|
$
|
638,565
|
|
$
|
646,485
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Current
maturities of long-term debt (note 8)
|
|
$
|
42
|
|
$
|
42
|
|
Customer
deposits
|
|
38,885
|
|
31,691
|
|
Accounts
payable
|
|
21,077
|
|
22,199
|
|
Accrued
compensation and benefits
|
|
26,989
|
|
29,533
|
|
Accrued
expenses and other current liabilities (note 5)
|
|
31,203
|
|
28,998
|
|
Total
current liabilities
|
|
118,196
|
|
112,463
|
|
|
|
|
|
|
|
Long-term
debt (note 8)
|
|
203,136
|
|
203,106
|
|
Other
long-term liabilities
|
|
25,449
|
|
24,993
|
|
Total
liabilities
|
|
346,781
|
|
340,562
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
Class A
common stock, par value $.01, 150,000,000 shares authorized; 48,297,870
shares issued at September 30, 2009 and 48,334,870 shares issued at
June 30, 2009
|
|
483
|
|
483
|
|
Class B
common stock, par value $.01, 600,000 shares authorized; no shares issued and
outstanding at September 30, 2009 and June 30, 2009
|
|
|
|
|
|
Preferred
stock, par value $.01, 1,055,000 shares authorized; no shares issued and
outstanding at September 30, 2009 and June 30, 2009
|
|
|
|
|
|
Additional
paid-in capital
|
|
356,969
|
|
356,446
|
|
|
|
357,452
|
|
356,929
|
|
Less:
Treasury stock (at cost), 19,380,941 shares at September 30, 2009 and
19,380,941 shares at June 30, 2009
|
|
(583,220
|
)
|
(583,220
|
)
|
Retained
earnings
|
|
516,716
|
|
531,747
|
|
Accumulated
other comprehensive income (note 12)
|
|
836
|
|
467
|
|
Total
shareholders equity
|
|
291,784
|
|
305,923
|
|
Total
liabilities and shareholders equity
|
|
$
|
638,565
|
|
$
|
646,485
|
|
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
,
|
|
|
|
2009
|
|
2008
|
|
Net
sales
|
|
$
|
136,190
|
|
$
|
205,841
|
|
Cost of sales
|
|
77,881
|
|
93,900
|
|
Gross profit
|
|
58,309
|
|
111,941
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling
|
|
33,605
|
|
55,302
|
|
General and administrative
|
|
39,980
|
|
46,058
|
|
Restructuring and impairment charge, net (note 5)
|
|
812
|
|
(1,630
|
)
|
Total operating expenses
|
|
74,397
|
|
99,730
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
(16,088
|
)
|
12,211
|
|
Interest and other miscellaneous income, net
|
|
797
|
|
1,100
|
|
Interest and other related financing costs (note 8)
|
|
2,981
|
|
2,901
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
(18,272
|
)
|
10,410
|
|
|
|
|
|
|
|
Income tax expense (benefit) (note 3)
|
|
(4,693
|
)
|
2,988
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,579
|
)
|
$
|
7,422
|
|
|
|
|
|
|
|
Per share data (note 11):
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
Net income (loss) per basic share
|
|
$
|
(0.47
|
)
|
$
|
0.26
|
|
Basic weighted average common shares
|
|
28,926
|
|
28,703
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Net income (loss) per diluted share
|
|
$
|
(0.47
|
)
|
$
|
0.26
|
|
Diluted weighted average common shares
|
|
28,926
|
|
28,847
|
|
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,
|
|
|
|
2009
|
|
2008
|
|
Operating activities:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,579
|
)
|
$
|
7,422
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
12,697
|
|
6,318
|
|
Compensation expense related to share-based awards
|
|
523
|
|
394
|
|
Provision (benefit) for deferred income taxes
|
|
(5,197
|
)
|
(1,850
|
)
|
Restructuring and impairment charge (benefit), net
|
|
266
|
|
(3,854
|
)
|
(Gain) loss on disposal of property, plant and
equipment
|
|
(470
|
)
|
(5
|
)
|
Other
|
|
55
|
|
66
|
|
Change in assets and liabilities, net of the
effects of acquired businesses:
|
|
|
|
|
|
Accounts receivable
|
|
33
|
|
931
|
|
Inventories
|
|
9,858
|
|
(561
|
)
|
Prepaid and other current assets
|
|
6,427
|
|
9,192
|
|
Other assets
|
|
186
|
|
84
|
|
Customer deposits
|
|
7,194
|
|
(5,312
|
)
|
Accounts payable
|
|
(1,122
|
)
|
(550
|
)
|
Accrued expenses and other current liabilities
|
|
(332
|
)
|
5,253
|
|
Other long-term liabilities
|
|
456
|
|
547
|
|
Net cash provided by operating activities
|
|
16,995
|
|
18,075
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
Proceeds from the disposal of property,
plant & equipment
|
|
5,935
|
|
5,729
|
|
Capital expenditures
|
|
(2,488
|
)
|
(11,093
|
)
|
Acquisitions
|
|
|
|
(375
|
)
|
Other
|
|
6
|
|
(249
|
)
|
Net cash provided by (used in) investing activities
|
|
3,453
|
|
(5,988
|
)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
Payments on long-term debt
|
|
(10
|
)
|
(10
|
)
|
Proceeds from issuance of common stock
|
|
|
|
2
|
|
Payment of deferred financing costs
|
|
(22
|
)
|
|
|
Payment of cash dividends
|
|
(1,448
|
)
|
(6,331
|
)
|
Net cash used in financing activities
|
|
(1,480
|
)
|
(6,339
|
)
|
Effect of exchange rate changes on cash
|
|
524
|
|
(207
|
)
|
Net increase in cash & cash equivalents
|
|
19,492
|
|
5,541
|
|
Cash & cash equivalents - beginning of
period
|
|
52,960
|
|
74,376
|
|
Cash & cash equivalents - end of period
|
|
$
|
72,452
|
|
$
|
79,917
|
|
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,
2009
(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, 2009
|
|
$
|
483
|
|
$
|
356,446
|
|
$
|
(583,220
|
)
|
$
|
467
|
|
$
|
531,747
|
|
$
|
305,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense (note 10)
|
|
|
|
523
|
|
|
|
|
|
|
|
523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared on common stock
|
|
|
|
|
|
|
|
|
|
(1,452
|
)
|
(1,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (note 12):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
357
|
|
|
|
357
|
|
Hedge amortization, net of tax and other
|
|
|
|
|
|
|
|
12
|
|
|
|
12
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
(13,579
|
)
|
(13,579
|
)
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
(13,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
$
|
483
|
|
$
|
356,969
|
|
$
|
(583,220
|
)
|
$
|
836
|
|
$
|
516,716
|
|
$
|
291,784
|
|
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.
We prepare our
consolidated financial statements in conformity with accounting principles
generally accepted in the United States, which requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. In
preparing these financial statements, the Company has evaluated events and
transactions subsequent to September 30, 2009 through November 9,
2009, the date of public issuance of this Quarterly Report on form 10-Q. Due to the inherent uncertainty involved in
making those estimates, actual results could differ from those estimates. Areas in which significant estimates have
been made include, but are not limited to, revenue recognition, the allowance
for doubtful accounts receivable, inventory obsolescence, tax valuation
allowances, useful lives for property, plant and equipment and definite lived
intangible assets, goodwill and indefinite lived intangible asset impairment
analyses, the evaluation of uncertain tax positions and the fair value of
assets acquired and liabilities assumed in business combinations.
Recently
Adopted Accounting Pronouncements
In June 2009,
the Financial Accounting Standards Board (FASB) issued guidance now codified
as FASB Accounting Standards Codification (ASC) Topic 105, Generally
Accepted Accounting Principles, as the single source of authoritative
nongovernmental U.S. GAAP. ASC Topic 105
does not change current U.S. GAAP, but is intended to simplify user access to
all authoritative U.S. GAAP by providing all authoritative literature related
to a particular topic in one place. All existing accounting standard documents
will be superseded and all other accounting literature not included in the ASC
will be considered non-authoritative. These provisions of ASC Topic 105 are
effective for interim and annual periods ending after September 15, 2009
and, accordingly, are effective for the Company for the current fiscal
reporting period. The adoption of this pronouncement did not have an impact on
the Companys financial condition or results of operations, but will impact our
financial reporting process by eliminating all references to pre-codification
standards. On the effective date of this Statement, the ASC superseded all
then-existing non-SEC accounting and reporting standards, and all other
non-grandfathered non-SEC accounting literature not included in the ASC became
non-authoritative. References to the pre-codification pronouncements are noted
in parenthesis.
In September 2006,
FASB issued guidance now codified as ASC Topic 820, Fair Value Measurements
and Disclosures, (SFAS No. 157) which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements and does not require any new fair value measurements. In February 2008, the FASB released
additional ASC Topic 820 guidance (FSP No. 157-2), which delayed the
effective date of the application of certain guidance related to non-financial
assets and non-financial liabilities until July 1, 2009 for the Company,
except for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis.
The Company adopted certain provisions of ASC Topic 820 effective July 1,
2008, except as it relates to those non-financial assets and non-financial
liabilities excluded as noted above. The
Company adopted the provisions of ASC Topic 820 with respect to our
non-financial assets and non-financial liabilities effective July 1, 2009.
The
6
Table of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
implementation of
this pronouncement did not have a material impact on our consolidated financial
position, results of operations or cash flows.
In December 2007, the FASB issued guidance now
codified as ASC Topic 805,
Business Combinations
(SFAS No. 141(R), which replaced SFAS No. 141). ASC Topic 805 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. ASC Topic 805 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 on the terms, conditions
and details of such acquisitions.
In June 2008,
the FASB issued guidance now codified as ASC Topic 260, Earnings Per Share
(EITF 03-6). Under ASC Topic 260, unvested share-based payment awards that
contain rights to receive non-forfeitable dividends (whether paid or unpaid)
are participating securities, and should be included in the two-class method of
computing earnings per share. The implementation of this pronouncement did not
have a material impact on our consolidated financial position, results of
operations or cash flows.
(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, 2009 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/A for the year ended June 30,
2009.
(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.
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. 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 25.7% and 28.7% for the three months
ended September 30, 2009 and 2008, respectively. The current effective tax
rate, resulting in a tax benefit, was adversely affected by the valuation
allowances against certain state and Canadian deferred tax assets. The prior
period effective tax rate benefitted from a one time adjustment of $0.7 million
made in the prior year quarter.
7
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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, 2009, 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,
2009 and June 30, 2009 are summarized as follows (in thousands):
|
|
September 30,
2009
|
|
June 30,
2009
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
119,721
|
|
$
|
130,180
|
|
Work in process
|
|
7,355
|
|
7,476
|
|
Raw materials
|
|
19,585
|
|
18,863
|
|
|
|
$
|
146,661
|
|
$
|
156,519
|
|
Inventories are
presented net of a related valuation allowance of $2.2 million at both September 30,
2009 and June 30, 2009.
(5) Restructuring
and Impairment Charges
In recent years,
we have announced and executed plans to consolidate our operations as part of
an overall strategy to maximize production efficiencies and maintain our
competitive advantage.
In fiscal 2009,
the Company made several announcements on changes to our operations as we
continue to improve the structure of our business especially in light of the
recent economic downturn. In January 2009,
the Company announced a plan to consolidate the operations of its Eldred,
Pennsylvania upholstery manufacturing plant and several of its retail service
centers. In June 2009, the Company announced the consolidation of its
Chino, California operations into its Maiden, North Carolina facility and the
consolidation of its Andover, Maine sawmill and dimension mill to its Beecher
Falls, Vermont sawmill and dimension mill operations. For these fiscal 2009
actions, the Company estimates pre-tax restructuring, impairment, accelerated
depreciation and other related charges will ultimately approximate $31 million,
consisting of an $18 million impact from long-lived assets, $8 million in
employee severance and other payroll and benefit costs, and $5 million in other
associated costs. By segment, we expect $24 million in costs for the
wholesale segment and $7 million for the retail segment. Total costs for
these 2009 actions in the current fiscal year by segment are $0.2 million of
restructuring charges and $6.6 million in accelerated depreciation for
Wholesale, and $0.4 million of restructuring charges for Retail. Cumulative
charges to date for these actions totaling $20.2 million have been classified
in the Statement of Operations as restructuring and impairment charges and $6.6
million of accelerated depreciation recorded in cost of sales. Approximately
800 employee positions and 140 contract worker positions have been or will be
eliminated due to these actions.
In fiscal 2008, we
announced a plan to consolidate the operations of certain Company-operated
retail design centers and retail service centers. In connection with this
initiative, we have permanently ceased operations at ten 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. Costs for the January 2008
actions in the current fiscal year by segment totaled $0.2 million, all of
which was for the Retail segment, mostly due to net losses on the sale of real
estate. Cumulative charges to date for these actions total $5.8 million, all of
which have been classified in the Statement of Operations as restructuring and
impairment charges of the Retail segment.
8
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Activity in the
Companys restructuring reserves is summarized in the table below (in
thousands) and is classified with accrued expenses and other current
liabilities in the Consolidated Balance Sheets:
|
|
Balance
June 30,
2009
|
|
New
charges
(credits)
|
|
Utilized
|
|
Adjustments
|
|
Balance
September
30, 2009
|
|
Fiscal 2009
Actions
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance, other payroll and benefit costs
|
|
$
|
3,864
|
|
$
|
96
|
|
$
|
(1,404
|
)
|
$
|
|
|
$
|
2,556
|
|
Other plant exit
costs
|
|
654
|
|
412
|
|
(523
|
)
|
|
|
543
|
|
Write down of
long-lived assets
|
|
|
|
54
|
|
(54
|
)
|
|
|
|
|
|
|
$
|
4,518
|
|
$
|
562
|
|
$
|
(1,981
|
)
|
$
|
|
|
$
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008
Actions
|
|
|
|
|
|
|
|
|
|
|
|
Employee
severance, other payroll and benefit costs
|
|
$
|
369
|
|
$
|
|
|
$
|
(10
|
)
|
$
|
|
|
$
|
359
|
|
Other plant exit
costs
|
|
2,892
|
|
|
|
(353
|
)
|
38
|
|
2,577
|
|
Write down of long-lived
assets
|
|
|
|
|
|
(212
|
)
|
212
|
|
|
|
|
|
$
|
3,261
|
|
$
|
|
|
$
|
(575
|
)
|
$
|
250
|
|
$
|
2,936
|
|
(6) Business
Acquisitions
There were no
acquisitions completed during the three months ended September 30, 2009.
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.
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.
9
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A summary of our
allocation of purchase price accounting for acquisitions during the three
months ended September 30, 2008 is provided below (in thousands).
|
|
Three Months Ended
September 30, 2008
|
|
Business segment
|
|
Retail
|
|
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,
Other Intangible Assets and Goodwill Impairment
At both September 30, 2009 and June 30,
2009, we had goodwill and other indefinite-lived intangible assets of $25.4
million and $19.7 million, respectively, all of which is included in the Wholesale
segment. The indefinite-lived intangible
assets represent Ethan Allen trade names.
The Company previously had goodwill in the Retail segment, all of which
was considered impaired and written off during the third quarter of fiscal
2009.
In accordance with ASC Topic 350,
Intangibles-Goodwill and Other
(SFAS No. 142), we do
not amortize goodwill or other indefinite-lived intangible assets but, rather,
we conduct an annual impairment analysis of goodwill and other indefinite lived
intangible assets the first of April each fiscal year, unless events occur
or circumstances change that would more likely than not reduce the fair value
of the goodwill or other indefinite lived intangible assets below their
carrying value. In determining whether an interim test is appropriate,
management considers several factors including changes in the Companys stock
price, financial performance, third party ratings on its long term debt, and
expected financial outlook of the business. Methods employed to value the
enterprise and the Companys retail and wholesale segments include the market
approach and the income approach, which are reconciled with the total market
capitalization of the Company. These valuation methods use historical revenues
and cash flows, as well as Company and external analysts financial projections
and apply discount rates, weighted average cost of capital rates, total
invested capital multiples, and premium control multiples. Fair value of our
trade name is valued using the relief-from-royalty method. Significant factors
used in trade name valuation are royalty rates, future growth and discount
rates, and expense rates.
The Company performed impairment
evaluations during the second and third quarters of fiscal 2009 as a result of
sudden and dramatic changes in the business climate and the Companys
performance, and determined as of March 31, 2009 that the $48.4 million of
goodwill in the Retail segment was considered impaired and fully written off at
that time. In the fiscal quarter ended June 30,
2009, the Company performed its annual impairment test and concluded there was
no additional impairment.
During the quarter ending September 30,
2009, the business performance was consistent with managements expectations,
revenues and operating costs were on plan, the Companys average quarterly
stock price increased 13% (from $12.11 for the quarter ended June 30,
2009, to $13.69 for the quarter ended September 30, 2009), and cash
reserves increased to $72.5 million at September 30, 2009 from $53.0
million at June 30, 2009. The Company considered these and other factors
and concluded that an interim impairment test was not required.
There can be no assurance that the
outcome of future reviews will not result in substantial impairment
charges. Impairment assessment
inherently involves judgments as to assumptions about expected future cash
flows and the
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Table of
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
impact of market conditions on those
assumptions. Future events and changing
market conditions may impact our assumptions as to prices, costs or other
factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we use in
testing for impairment are reasonable, significant changes in any of our
assumptions could produce a significantly different result.
(8) Borrowings
Total
debt obligations at September 30, 2009 and June 30, 2009 consist of
the following (in thousands):
|
|
September 30,
|
|
June 30,
|
|
|
|
2009
|
|
2009
|
|
5.375%
Senior Notes due 2015
|
|
$
|
199,037
|
|
$
|
198,997
|
|
Industrial
revenue bonds
|
|
3,855
|
|
3,855
|
|
Other
debt
|
|
286
|
|
296
|
|
Total
debt
|
|
203,178
|
|
203,148
|
|
Less
current maturities
|
|
42
|
|
42
|
|
Total
long-term debt
|
|
$
|
203,136
|
|
$
|
203,106
|
|
In September 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 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.
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.
On May 29, 2009, the Company entered
into a three-year, $40 million senior secured asset-based revolving credit
facility (the Facility). The Facility provides revolving credit financing of
up to $40 million, subject to borrowing base availability, and includes an
accordion feature which, if exercised, would provide up to an additional $20
million of financing. At the Companys
option, revolving loans under the Agreement bear interest at an annual rate of
either:
(a) London Interbank Offered rate
(LIBOR) plus 3.25% to 4.25%, based on the average availability, or
(b) the higher of (i) a prime
rate, (ii) the federal funds effective rate plus 0.50%, or (iii) a
LIBOR rate plus 1.00% plus, in each case, an additional 2.25% to 3.25%, based
on average availability.
The Facility is secured by all property
owned, leased or operated by the Company in the United States excluding any
real property owned by the Company and also excludes any intellectual property
owned by the Company unless availability is less than or equal to $17.5
million, and contains customary covenants which may limit the Companys ability
to incur debt; engage in mergers and consolidations; make restricted payments
(including dividends); sell certain assets; and make investments.
At September 30,
2009, we had no revolving loans, and $12.5 million in trade and standby letters
of credit outstanding under the Facility. Remaining availability under the
revolver totaled $27.5 million subject to limitations set forth in the
agreement noted above. We are in compliance with the terms and conditions of
the agreement and as a result, the coverage charge ratio, or other restricted
payment limitations did not apply. As of September 30, 2009, we are in
compliance with all covenants of our credit facility.
On October 23, 2009, the Facility
was expanded to $60 million. See Note 15 - Subsequent Events for additional
details.
11
Table of
Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(9) Litigation
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 fiscal year ending June 30,
2009, our liability with respect to three active sites currently 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), where we and/or our subsidiaries had been named as a
Potentially Responsive Party (PRP) located in Southington, Connecticut; High
Point, North Carolina; and Atlanta, Georgia has been resolved.
In each case we were not a major
contributor based on the very small volume of waste generated by us in relation
to total volume at those sites and were able to take part in de minimus
settlement arrangements. Specifically,
with respect to the Southington site, our volumetric share is less than 1% of
over 51 million gallons disposed of at the site and there are more than 1,000
PRPs. With respect to the High Point
site, our volumetric share 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). With respect to the Atlanta site, a
former solvent recycling/reclamation facility, our volumetric share is less
than 1% of over 20 million gallons disposed of at the site by more than 1,700
PRPs.
In addition to the now settled actions
discussed above, 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. In May, 2009, we were notified by the State
that it had conducted an initial environmental study and that we have been
named as a PRP. We believe that we are
not a major contributor; however, a review of the initial environmental study
is ongoing.
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.
As of September 30, 2009, 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
new waste minimization programs and/or enhancing existing programs with the
objective of (i) reducing the total
12
Table of
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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 Mr. Kathwari 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, options to purchase an additional 90,000 shares on July 1, 2008, and
options to purchase an additional 60,000 shares on July 1, 2009, 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 equal installments 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 equal installments on
each of June 30, 2009 and 2010. The
2009 grant was issued at an exercise price of $10.68 and vests 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 received, 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,
|
|
|
|
2009
|
|
2008
|
|
Weighted average common shares outstanding for basic
calculation
|
|
28,926
|
|
28,703
|
|
Effect of dilutive stock options and other share-based
awards
|
|
|
|
144
|
|
Weighted average common shares outstanding adjusted
for dilution calculation
|
|
28,926
|
|
28,847
|
|
As of September 30,
2009 and 2008, stock options to purchase 2,251,389 and 1,813,855 common shares,
respectively, were excluded from the respective diluted earnings per share
calculation because their impact was anti-dilutive.
13
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.
Accumulated other
comprehensive income, comprised of losses on certain derivative instruments and
accumulated foreign currency translation adjustments, totaled $0.8 million at September 30,
2009 and $0.5 million at June 30, 2009.
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
ACS
Topic 820,
Fair value measurements and disclosures
(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, ASC Topic 820 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.
The following
section describes the valuation methodologies we use to measure different
financial assets and liabilities at fair value.
The
Company partially adopted ASC Topic 820 on July 1, 2008 due to the fact
that a portion of ASC Topic 820 was previously deferred for one year for all
nonfinancial assets and nonfinancial liabilities that were not recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). On July 1, 2009,
the Company adopted the deferred portion of ACS Topic 820. There was no impact to the Companys
financial position
14
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Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
or
results of operations resulting from the adoption of the deferred portion of
ACS Topic 820. The Company has now fully
adopted ASC Topic 820.
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,
2009, the Companys assets and liabilities measured at fair value on a
recurring basis consist of $59.7 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, 2009, 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 segment, we maintain revenue information according
to each respective product line (i.e. case goods, upholstery, or home
accessories and other).
15
Table of
Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
A breakdown of
wholesale sales by these product lines for the three months ended September 30,
2009 and 2008 is provided as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
Case Goods
|
|
40
|
%
|
41
|
%
|
Upholstered Products
|
|
45
|
|
42
|
|
Home Accessories and Other
|
|
15
|
|
17
|
|
|
|
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.
16
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Segment
information for the three months ended September 30, 2009 and 2008 is set
forth as follows:
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
Net sales:
|
|
|
|
|
|
Wholesale segment
|
|
$
|
81,281
|
|
$
|
121,295
|
|
Retail segment
|
|
103,150
|
|
155,870
|
|
Elimination of
inter-company sales
|
|
(48,241
|
)
|
(71,324
|
)
|
Consolidated Total
|
|
$
|
136,190
|
|
$
|
205,841
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
Wholesale segment (1)
|
|
$
|
(4,660
|
)
|
$
|
11,885
|
|
Retail segment (2)
|
|
(11,349
|
)
|
(3,052
|
)
|
Adjustment of inter-company
profit (3)
|
|
(79
|
)
|
3,378
|
|
Consolidated Total
|
|
$
|
(16,088
|
)
|
$
|
12,211
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
Wholesale segment
|
|
$
|
801
|
|
$
|
1,632
|
|
Retail segment
|
|
1,687
|
|
9,461
|
|
Acquisitions (4)
|
|
|
|
375
|
|
Consolidated Total
|
|
$
|
2,488
|
|
$
|
11,468
|
|
|
|
September 30,
|
|
June 30,
|
|
Total assets
|
|
2009
|
|
2009
|
|
Wholesale segment
|
|
$
|
281,075
|
|
$
|
276,250
|
|
Retail segment
|
|
385,279
|
|
397,877
|
|
Inventory profit
elimination (5)
|
|
(27,789
|
)
|
(27,642
|
)
|
Consolidated Total
|
|
$
|
638,565
|
|
$
|
646,485
|
|
(1)
Operating income (loss) for the wholesale
segment for the three months ended September 30, 2009 and 2008 includes
pre-tax restructuring and impairment charges of $0.2 million and $0.4 million,
respectively.
(2)
Operating income (loss) for the retail segment for the
three months ended September 30, 2009 and 2008 includes pre-tax
restructuring and impairment charges of $0.7 million and a net recovery of $2.0
million, respectively.
(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)
Acquisitions for the three months ended September 30,
2008 include the purchase of two retail design centers.
(5)
Represents the 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 49 independent retail design centers
located outside the United States at September 30, 2009. Less than five
percent of our net sales were derived from sales to those retail design
centers.
(15) Subsequent
Events
Ethan Allen declares quarterly
cash dividend
Ethan Allens Board of Directors has declared a
quarterly cash dividend of $0.05 per share, which will be payable to
shareholders of record as of October 9, 2009 and paid on October 26,
2009.
Ethan Allen expands revolving
credit facility
On October 23, 2009, the Company
amended its three-year revolving credit facility by increasing the credit
financing by $20 million, with total borrowing under the agreement (subject to
borrowing base availability) of up to $60
17
Table
of Contents
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
million. The Amended Facility is secured
by all assets owned, leased or operated by the Company in the United States
including intellectual property, and excludes any real estate owned by the
Company.
Standard & Poors lowers
credit rating
On November 2, 2009, Standard &
Poors Rating Services lowered its corporate credit and senior unsecured debt
ratings to B+ from BB and indicated the outlook was negative. The rating
agency cited very weak operating performance due to lower consumer spending and
a tough retail environment in its rating action. The Company believes this
change does not materially affect its ability to operate and further believes
it has adequate liquidity and cash flow to meet current business needs.
(16) 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 domestic 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.
(which was legally dissolved in October 2009), and our other subsidiaries
which are not guarantors are called the Non-Guarantors. During the quarter
ended December 31, 2008, we determined that our international subsidiaries
in Canada and Mexico are non-guarantors. The Company has reclassified, for all
prior periods presented, the financial results of these international
subsidiaries to reflect their non-guarantor status.
The following tables set
forth the condensed consolidating balance sheets as of September 30, 2009
and June 30, 2009, the condensed consolidating statements of operations
for the three months ended September 30, 2009 and 2008, and the condensed
consolidating statements of cash flows for the three months ended September 30,
2009 and 2008 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.
18
Table
of Contents
ETHAN
ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (Unaudited)
CONDENSED
CONSOLIDATING BALANCE SHEET
(In thousands)
September 30,
2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
68,296
|
|
$
|
2,888
|
|
$
|
1,268
|
|
$
|
|
|
$
|
72,452
|
|
Accounts receivable, net
|
|
|
|
12,269
|
|
540
|
|
244
|
|
|
|
13,053
|
|
Inventories
|
|
|
|
|
|
169,742
|
|
4,708
|
|
(27,789
|
)
|
146,661
|
|
Prepaid expenses and other current assets
|
|
|
|
12,736
|
|
6,469
|
|
620
|
|
|
|
19,825
|
|
Intercompany
|
|
|
|
767,471
|
|
229,281
|
|
(3,294
|
)
|
(993,458
|
)
|
|
|
Total current assets
|
|
|
|
860,772
|
|
408,920
|
|
3,546
|
|
(1,021,247
|
)
|
251,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
11,201
|
|
304,005
|
|
4,978
|
|
|
|
320,184
|
|
Goodwill and other intangible assets
|
|
|
|
37,905
|
|
7,223
|
|
|
|
|
|
45,128
|
|
Other assets
|
|
|
|
20,454
|
|
802
|
|
6
|
|
|
|
21,262
|
|
Investment in affiliated companies
|
|
599,745
|
|
(39,991
|
)
|
|
|
|
|
(559,754
|
)
|
|
|
Total assets
|
|
$
|
599,745
|
|
$
|
890,341
|
|
$
|
720,950
|
|
$
|
8,530
|
|
$
|
(1,581,001
|
)
|
$
|
638,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$
|
|
|
$
|
|
|
$
|
42
|
|
$
|
|
|
$
|
|
|
$
|
42
|
|
Customer deposits
|
|
|
|
|
|
37,175
|
|
1,710
|
|
|
|
38,885
|
|
Accounts payable
|
|
|
|
6,278
|
|
14,559
|
|
240
|
|
|
|
21,077
|
|
Accrued expenses and other current liabilities
|
|
1,559
|
|
39,363
|
|
16,968
|
|
302
|
|
|
|
58,192
|
|
Intercompany
|
|
306,402
|
|
8,123
|
|
673,183
|
|
5,750
|
|
(993,458
|
)
|
|
|
Total current liabilities
|
|
307,961
|
|
53,764
|
|
741,927
|
|
8,002
|
|
(993,458
|
)
|
118,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
199,038
|
|
4,098
|
|
|
|
|
|
203,136
|
|
Other long-term liabilities
|
|
|
|
10,571
|
|
14,737
|
|
141
|
|
|
|
25,449
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
307,961
|
|
263,373
|
|
760,762
|
|
8,143
|
|
(993,458
|
)
|
346,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
291,784
|
|
626,968
|
|
(39,812
|
)
|
387
|
|
(587,543
|
)
|
291,784
|
|
Total liabilities and shareholders equity
|
|
$
|
599,745
|
|
$
|
890,341
|
|
$
|
720,950
|
|
$
|
8,530
|
|
$
|
(1,581,001
|
)
|
$
|
638,565
|
|
19
Table
of Contents
ETHAN
ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (Unaudited)
CONDENSED
CONSOLIDATING BALANCE SHEET
(In thousands)
June 30,
2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
47,712
|
|
$
|
3,592
|
|
$
|
1,656
|
|
$
|
|
|
$
|
52,960
|
|
Accounts receivable, net
|
|
|
|
12,049
|
|
783
|
|
254
|
|
|
|
13,086
|
|
Inventories
|
|
|
|
|
|
179,705
|
|
4,456
|
|
(27,642
|
)
|
156,519
|
|
Prepaid expenses and other current assets
|
|
|
|
20,509
|
|
8,084
|
|
544
|
|
|
|
29,137
|
|
Intercompany receivables
|
|
|
|
782,736
|
|
227,453
|
|
(3,010
|
)
|
(1,007,179
|
)
|
|
|
Total current assets
|
|
|
|
863,006
|
|
419,617
|
|
3,900
|
|
(1,034,821
|
)
|
251,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
|
11,748
|
|
317,144
|
|
4,707
|
|
|
|
333,599
|
|
Goodwill and other intangible assets
|
|
|
|
37,905
|
|
7,223
|
|
|
|
|
|
45,128
|
|
Other assets
|
|
|
|
15,323
|
|
727
|
|
6
|
|
|
|
16,056
|
|
Investment in affiliated companies
|
|
612,391
|
|
(20,616
|
)
|
|
|
|
|
(591,775
|
)
|
|
|
Total assets
|
|
612,391
|
|
907,366
|
|
744,711
|
|
8,613
|
|
(1,626,596
|
)
|
646,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
42
|
|
|
|
|
|
42
|
|
Customer deposits
|
|
|
|
|
|
30,412
|
|
1,279
|
|
|
|
31,691
|
|
Accounts payable
|
|
|
|
8,851
|
|
13,106
|
|
242
|
|
|
|
22,199
|
|
Accrued expenses and other current liabilities
|
|
1,552
|
|
41,004
|
|
15,707
|
|
268
|
|
|
|
58,531
|
|
Intercompany payables
|
|
304,917
|
|
8,123
|
|
687,826
|
|
6,313
|
|
(1,007,179
|
)
|
|
|
Total current liabilities
|
|
306,469
|
|
57,978
|
|
747,093
|
|
8,102
|
|
(1,007,179
|
)
|
112,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
198,998
|
|
4,108
|
|
|
|
|
|
203,106
|
|
Other long-term liabilities
|
|
|
|
10,565
|
|
14,290
|
|
138
|
|
|
|
24,993
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
306,469
|
|
267,541
|
|
765,491
|
|
8,240
|
|
(1,007,179
|
)
|
340,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
305,922
|
|
639,825
|
|
(20,780
|
)
|
373
|
|
(619,417
|
)
|
305,923
|
|
Total liabilities and shareholders equity
|
|
$
|
612,391
|
|
$
|
907,366
|
|
$
|
744,711
|
|
$
|
8,613
|
|
$
|
(1,626,596
|
)
|
$
|
646,485
|
|
20
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, 2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
$
|
81,410
|
|
$
|
136,996
|
|
$
|
4,899
|
|
$
|
(87,115
|
)
|
$
|
136,190
|
|
Cost of sales
|
|
|
|
66,961
|
|
95,200
|
|
2,703
|
|
(86,983
|
)
|
77,881
|
|
Gross profit
|
|
|
|
14,449
|
|
41,796
|
|
2,196
|
|
(132
|
)
|
58,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
41
|
|
11,032
|
|
59,973
|
|
2,539
|
|
|
|
73,585
|
|
Restructuring and impairment charge, (credit) net
|
|
|
|
|
|
812
|
|
|
|
|
|
812
|
|
Total operating expenses
|
|
41
|
|
11,032
|
|
60,785
|
|
2,539
|
|
|
|
74,397
|
|
Operating income (loss)
|
|
(41
|
)
|
3,417
|
|
(18,989
|
)
|
(343
|
)
|
(132
|
)
|
(16,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other miscellaneous income, net
|
|
(13,538
|
)
|
(18,596
|
)
|
33
|
|
|
|
32,898
|
|
797
|
|
Interest and other related financing costs
|
|
|
|
2,905
|
|
76
|
|
|
|
|
|
2,981
|
|
Income (loss) before income tax expense
|
|
(13,579
|
)
|
(18,084
|
)
|
(19,032
|
)
|
(343
|
)
|
32,766
|
|
(18,272
|
)
|
Income tax expense
|
|
|
|
(4,693
|
)
|
|
|
|
|
|
|
(4,693
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(13,579
|
)
|
$
|
(13,391
|
)
|
$
|
(19,032
|
)
|
$
|
(343
|
)
|
$
|
32,766
|
|
$
|
(13,579
|
)
|
Three Months Ended September 30, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
$
|
121,596
|
|
$
|
208,800
|
|
$
|
6,080
|
|
$
|
(130,635
|
)
|
$
|
205,841
|
|
Cost of sales
|
|
|
|
88,405
|
|
136,394
|
|
3,272
|
|
(134,171
|
)
|
93,900
|
|
Gross profit
|
|
|
|
33,191
|
|
72,406
|
|
2,808
|
|
3,536
|
|
111,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
41
|
|
13,291
|
|
84,986
|
|
3,042
|
|
|
|
101,360
|
|
Restructuring and impairment charge, (credit) net
|
|
|
|
|
|
(1,630
|
)
|
|
|
|
|
(1,630
|
)
|
Total operating expenses
|
|
41
|
|
13,291
|
|
83,356
|
|
3,042
|
|
|
|
99,730
|
|
Operating income (loss)
|
|
(41
|
)
|
19,900
|
|
(10,950
|
)
|
(234
|
)
|
3,536
|
|
12,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and other miscellaneous income, net
|
|
7,463
|
|
(10,136
|
)
|
2
|
|
6
|
|
3,765
|
|
1,100
|
|
Interest and other related financing costs
|
|
|
|
2,825
|
|
76
|
|
|
|
|
|
2,901
|
|
Income (loss) before income tax expense
|
|
7,422
|
|
6,939
|
|
(11,024
|
)
|
(228
|
)
|
7,301
|
|
10,410
|
|
Income tax expense
|
|
|
|
2,988
|
|
|
|
|
|
|
|
2,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
7,422
|
|
$
|
3,951
|
|
$
|
(11,024
|
)
|
$
|
(228
|
)
|
$
|
7,301
|
|
$
|
7,422
|
|
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, 2009
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
1,448
|
|
$
|
20,697
|
|
$
|
(4,238
|
)
|
$
|
(912
|
)
|
$
|
|
|
$
|
16,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(97
|
)
|
(2,391
|
)
|
|
|
|
|
(2,488
|
)
|
Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and
equipment
|
|
|
|
|
|
5,935
|
|
|
|
|
|
5,935
|
|
Other
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
Net cash used in investing activities
|
|
|
|
(91
|
)
|
3,544
|
|
|
|
|
|
3,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing costs
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
(22
|
)
|
Dividends paid
|
|
(1,448
|
)
|
|
|
|
|
|
|
|
|
(1,448
|
)
|
Net cash provided by (used in) financing activities
|
|
(1,448
|
)
|
(22
|
)
|
(10
|
)
|
|
|
|
|
(1,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
|
|
|
|
|
524
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
|
|
20,584
|
|
(704
|
)
|
(388
|
)
|
|
|
19,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
|
47,712
|
|
3,592
|
|
1,656
|
|
|
|
52,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
|
|
$
|
68,296
|
|
$
|
2,888
|
|
$
|
1,268
|
|
$
|
|
|
$
|
72,452
|
|
22
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, 2008
|
|
Parent
|
|
Issuer
|
|
Guarantors
|
|
Non-Guarantors
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
6,329
|
|
$
|
6,500
|
|
$
|
5,807
|
|
$
|
(561
|
)
|
$
|
|
|
$
|
18,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(644
|
)
|
(10,445
|
)
|
(4
|
)
|
|
|
(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
|
)
|
(5,327
|
)
|
(4
|
)
|
|
|
(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
|
|
470
|
|
(772
|
)
|
|
|
5,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents beginning of period
|
|
|
|
71,117
|
|
1,307
|
|
1,952
|
|
|
|
74,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
|
|
$
|
76,960
|
|
$
|
1,777
|
|
$
|
1,180
|
|
$
|
|
|
$
|
79,917
|
|
23
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/A for the year ended June 30, 2009.
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/A
for the year ended June 30, 2009 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
The Companys
consolidated financial statements are based on the accounting policies
used. Certain accounting polices require
that estimates and assumptions be made by management for use in the preparation
of the financial statements. Critical
accounting policies are those that are central to the presentation of the
Companys financial condition and results and that require subjective or
complex estimates by management. The
Company updated its disclosure regarding Impairment of Long-Lived Assets and
Goodwill. For further information
regarding the Companys other critical accounting policies, see the Companys
2009 Annual Report on Form 10-K/A filed with the SEC on August 27,
2009
Impairment
of Long-Lived Assets and Goodwill
We periodically evaluate whether events
or circumstances have occurred that indicate that long-lived and
indefinite-lived assets may not be recoverable or that the remaining useful
life may warrant revision. When such
events or circumstances are present, the Company determines whether the
carrying value exceeds the fair value as described below.
In accordance with ASC
Topic 360, Property, Plant and Equipment (SFAS No. 144), the
recoverability of long-lived assets are evaluated for impairment by determining
whether the carrying value will be recovered through the expected undiscounted
future cash flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an
impairment loss equal to the excess of the assets carrying value over its fair
value is recorded. The long-term nature
of these assets requires the estimation of cash inflows and outflows several
years into the future and only takes into consideration technological advances
known at the time of the impairment test.
In accordance with ASC
Topic 350, Intangibles-Goodwill and Other (SFAS No. 142), goodwill and
other indefinite-lived intangible assets are evaluated for impairment on an
annual basis and between annual tests
24
Table
of Contents
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 of goodwill and other intangible assets during the fourth
quarter of each fiscal year.
To evaluate goodwill, the
Company determines the current fair value of the Reporting Units using a
combination of Market and Income approaches. In the Market approach, the Guideline
Company method is used, which focuses on comparing the Companys risk profile
and growth prospects to reasonably similar publicly traded companies. Key assumptions used for the Guideline
Company method are total invested capital (TIC) multiples for revenues and
operating cash flows, as well as consideration of control premiums. The TIC multiples are determined based on
public furniture companies within our peer group, and if appropriate, recent
comparable transactions are also considered. Control premiums are determined
using recent comparable transactions in the open market. Under the Income
approach, a discounted cash flow method is used, which includes a terminal
value, and is based on external analyst financial projection estimates, as well
as internal financial projection estimates prepared by management. The
long-term terminal growth rate assumptions reflect our current long-term view
of the market in which we compete.
Discount rates use the weighted average cost of capital for companies
within our peer group, adjusted for specific company risk premium factors.
The fair value of our
trade name, which is the Companys only indefinite lived intangible asset other
than goodwill, is valued using the relief-from-royalty method. Significant
factors used in trade name valuation are rates for royalties, future growth,
and a discount factor. Royalty rates are
determined using an average of recent comparable values. Future growth rates are based on the
Companys perception of the long term values in the market in which we compete,
and the discount rate is determined using the weighted average cost of capital
for companies within our peer group, adjusted for specific company risk premium
factors. The fair value of the trade name substantially exceeded the carrying
value in fiscal 2009.
As a result of the economic
downturn that began in the fall of 2008, the Companys revenues and operating
margins were negatively impacted. In
response, the Company reduced headcount, consolidated its manufacturing,
retail, and logistics footprint and repositioned its marketing approach. As a result of these changes, the Companys
cash flow forecasts were continually updated to reflect the rapid changes in
the business and the industry. During fiscal
2009, the Company
determined
that $48.4 million of goodwill in the Retail segment was considered impaired
and fully written off.
The cash flow projections used in
its fair value evaluations are the best estimates of the Company and require
significant management judgment.
In the fiscal quarter
ended June 30, 2009, the Company performed its annual impairment test and
no impairment of goodwill was appropriate as the fair value of the wholesale
reporting unit net assets exceeded the book value by approximately 10%. During
the quarter ending September 30, 2009, the business performance was
consistent with the previous quarter, revenues and operating costs were on
plan,
the Companys
average quarterly stock price increased 13% (from $12.11 for the quarter ended June 30,
2009, to $13.69 for the quarter ended September 30, 2009),
and
cash reserves increased to $72.5 million at September 30, 2009 from $53.0
million at June 30, 2009. The Company considered these and other factors
and concluded that an interim impairment test was not required. There can be no
assurance that the outcome of future reviews will not result in substantial
impairment charges.
To calculate fair value
of the assets described above, management relies on estimates and assumptions
which by their nature have varying degrees of uncertainty. Wherever possible,
management therefore looks for third party transactions as described above to
provide the best possible support for the assumptions incorporated. Management
considers several factors to be significant when estimating fair value
including expected financial outlook of the business, changes in the Companys
stock price, the impact of changing market conditions on financial performance
and expected future cash flows, and other factors. Deterioration in any of
these factors may result in a lower fair value assessment which could lead to
impairment of the long-lived assets and goodwill of the Company.
25
Table
of Contents
Results
of Operations
Our Company has been severely impacted by the economic
factors in the United States and abroad which we began to feel in earnest
during our second quarter of fiscal 2009.
Weakness in the U.S. economy from continued high unemployment, volatile
capital markets, depressed housing prices and tight consumer spending have all
put negative stress on the economy which continues to have a negative impact on
our business. As we work through these
difficult times, we have taken dramatic actions to significantly reduce our
infrastructure in all facets of our business including closing and realigning
manufacturing plants, consolidating logistics operations, and closing
under-performing retail design centers. We have also launched initiatives to
increase sales, such as special savings product promotions, our designer
affiliate program and converting our case goods business to custom.
In fiscal 2009, the
Company made several announcements on changes to our operations. In January 2009, the Company announced a
plan to consolidate the operations of its Eldred, Pennsylvania upholstery
manufacturing plant and several of its retail service centers. In June 2009,
the Company announced the consolidation of its Chino, California operations
into its Maiden, North Carolina facility and the consolidation of its Andover,
Maine sawmill and dimension mill to its Beecher Falls, Vermont sawmill and
dimension mill operations which will continue to operate while the other
manufacturing operations from Beecher Falls were moved to our plant in Orleans,
Vermont. In large part, these efforts to realign our manufacturing operations
were concluded in this first quarter of fiscal 2009. The Company estimates
pre-tax restructuring, impairment, accelerated depreciation and other related
charges for all of the fiscal 2009 actions will ultimately approximate $31
million, consisting of an $18 million impact from long-lived assets, $8 million
in employee severance and other payroll and benefit costs, and $5 million in
other associated costs. By segment, we expect $24 million in costs for
the wholesale segment and $7 million for the retail segment. Total costs
for these 2009 actions in the current fiscal year by segment are $0.2 million
of restructuring charges and $6.6 million in accelerated depreciation for Wholesale,
and $0.4 million of restructuring charges for Retail. Cumulative charges to
date for these actions totaling $20.2 million have been classified in the
Statement of Operations as restructuring and impairment charges and $6.6
million of accelerated depreciation recorded in cost of sales. Approximately
800 employee positions and 140 contract worker positions have been or will be
eliminated due to these actions.
In fiscal 2008, we
announced a plan to consolidate the operations of certain Company-operated
retail design centers and retail service centers. In connection with this
initiative, we have permanently ceased operations at ten 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. Costs for the January 2008
actions in the current fiscal year totaled $0.2 million, all of which was for
the Retail segment, mostly due to net losses on the sale of real estate.
Cumulative charges to date for these actions total $5.8 million, all of which
have been classified in the Statement of Operations as restructuring and
impairment charges of the Retail segment.
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, 2009 and
2008 for the components of consolidated revenue and operating income, capital
expenditures, and total assets by segment.
Quarter
Ended September 30, 2009 Compared to Quarter Ended September 30, 2008
Consolidated revenue
for the three months ended September 30, 2009 decreased 33.8% to $136.2
million, from $205.8 million for the three months ended September 30,
2008. During the quarter, sales continue to be affected by the negative
economic stresses mentioned earlier, as well as the use of highly-promotional
pricing strategies by the Companys competitors. These factors were partially offset by (i) several
new marketing initiatives including
26
Table
of Contents
our rewards program and
special savings pricing, and our new interactive web site ethanalleninc.com, (ii) the
continued use of national television media, where we emphasize to clients our
interior design services and the full line of our quality product offerings,
and (iii) the positive effects of efforts to reposition the retail
network.
Wholesale
revenue
for the first quarter of fiscal 2009
decreased 33.0% to $81.3 million from $121.3 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.
These
decreases were partially offset by our rewards program and celebration pricing
during the quarter.
In addition, there were two more
independent retail design centers at September 30, 2009, which increased
to 134 from 132, including two locations transferred into the companys Retail
division during the year.
There were the same number of
shipping days in the quarter both this year and last year.
Retail
revenue
from Ethan Allen-owned design centers
for the three months ended September 30, 2009 decreased 33.8% to $103.2
million from $155.9 million for the three months ended September 30,
2008. We believe the decrease in retail
sales by Ethan Allen-operated design centers is due to the same soft market
conditions experienced by the wholesale segment, as evidenced by a 35.3%
decrease in comparable store sales, a net $2.1 million decrease in new/closed
store sales, and a net decrease in the number of Ethan Allen-operated design
centers to 155 as of September 30, 2009 as compared to 160 as of September 30,
2008. These decreases were partially
offset by our rewards program and celebration pricing during the quarter. During the quarter, we opened two (including
one relocation) and closed five 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 19.5% while
comparable design centers written business decreased 20.0%. Over that same period, wholesale orders
decreased 21.4%. Both retail and
wholesale written business reflect the softer retail environment for home
furnishings noted throughout the period as a result of continued negative
economic stresses previously discussed.
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. We believe that implementation of the team
concept has helped us continue to improve the customer service experience. We also believe that over time, we will
benefit from (i) our repositioning of the retail network, (ii) new
product introductions, (iii) new marketing initiatives such as our rewards
program, special savings pricing, and our new interior design affiliate (IDA)
program, (iv) continued use of technology including our state-of-the-art
website coupled with personal service from our design professionals, and (iv) ongoing
use of national television and shelter magazines as advertising media.
Gross
profit
decreased during the quarter to $58.3
million from $111.9 million in the prior year comparable quarter. The 47.9% decrease in gross profit was
primarily attributable to (i) the reduction in net sales of 33.8%, with an
overall decrease in shipments in both market segments, (ii) lower margin
percentages within the wholesale segment due to accelerated depreciation from
closed manufacturing operations totaling $6.6 million, under absorption of
plant overhead costs on the lower production volume, and other plant transition
costs related to the restructuring of our manufacturing plants, and (iii) lower
margins within the retail segment, due to
discounted sales through our rewards
program and celebration pricing initiatives and sales of discontinued product
and floor samples. The sales mix
remained constant with retail sales representing 76% of total sales in both the
current and prior year period. Consolidated gross margin decreased to 42.8%
from 54.4% in the prior year as a result, primarily, of the factors set forth
above.
27
Table
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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, 2009 and 2008:
Operating
expenses
decreased 25.4% to $74.4 million, but
increased to 54.6% of sales in the current quarter from $99.7 million, or 48.5%
of sales in the prior year quarter.
Selling expenses were down in absolute terms due to actions taken and
lower sales volume. Salary related costs
decreased due to the reduced number of employees and other cost cutting efforts
taken by the Company. Advertising
expenses were down $2.3 million versus the previous year first fiscal quarter.
Consolidated
operating income (loss)
for the three month period ended September 30,
2009 was a loss of $16.1 million, or 11.8% of sales, as compared to income of
$12.2 million, or 5.9% of sales, for the three months ended September 30,
2008. This decrease of $28.3 million is
due to a decrease in gross profit mostly due to reduced sales, and accelerated
depreciation charges due to restructuring activities, partly offset by a
decrease in period over period operating expenses, both of which were discussed
previously.
Wholesale
operating income (loss)
for the three months ended September 30,
2009 totaled a loss of $4.7 million, or a negative 5.7% of sales, as compared
to income of $11.9 million, or 9.8% of sales, in the prior year comparable
quarter. The decrease of $16.5 million was primarily attributable to a decrease
in sales volume, and the plant transition costs including the $6.6 million of
accelerated depreciation noted above relating to the closure of manufacturing
plants as discussed previously.
Retail
operating loss
increased $8.3 million to a loss of
$11.3 million, or a negative 11.0% of sales, for the first quarter of fiscal
2010 from a loss of $3.1 million, or a negative 2.0% of sales, for the first
quarter of fiscal 2009. The increase in
retail operating loss generated by Ethan Allen-operated design centers was
primarily due to reduced sales attributed to the weak retail environment for
home furnishings offset partially by cost cutting actions taken.
Interest
and other miscellaneous income, net
decreased $0.3 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.
Interest
and other related financing costs
amounted to just under $3.0 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,
2009 totaled a benefit of $4.7 million as compared to an expense of $3.0
million for the three months ended September 30, 2008. Our effective tax rate for the current
quarter was 25.7% compared to 28.7% in the prior year quarter. The current
effective tax rate, resulting in a tax benefit, was adversely affected by
valuation allowances against certain state and Canadian deferred tax assets.
The prior period tax rate benefitted from a one time adjustment of $0.7 million
made in the prior year quarter.
Net
income (loss)
for the three months ended September 30,
2009, was a loss of $13.6 million as compared to net income of $7.4 million in
the prior year comparable period. This
resulted in a net loss per diluted share of $0.47 in the current quarter and
net income per diluted share of $0.26 in the prior year quarter.
Liquidity
and Capital Resources
At September 30,
2009, we held cash and cash equivalents of $72.5 million. Our principal sources of liquidity include
cash and cash equivalents, cash flow from operations, the revolving line of
credit, and borrowings. The global
economy continues to be unsettled, and capital markets continue to be 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
28
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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. Our access to the credit facility could also
be negatively affected if operating results fall below prescribed levels or if
the assets used to determine the borrowing base availability fall below the
total available credit under the facility.
Continued turbulence in the financial markets could also adversely
affect the cost and availability of financing to us in the future.
On May 29, 2009, the Company entered
into a three-year, $40 million senior secured asset-based revolving credit
facility (the Facility). The Facility provides revolving credit financing of
up to $40 million, subject to borrowing base availability, and includes an
accordion feature which, if exercised, would provide up to an additional $20
million of financing. At the Companys
option, revolving loans under the Agreement bear interest at an annual rate of
either:
(a) London
Interbank Offered rate (LIBOR) plus 3.25% to 4.25%, based on the average
availability, or
(b) the
higher of (i) a prime rate, (ii) the federal funds effective rate
plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, in each case, an
additional 2.25% to 3.25%, based on average availability.
The Facility is secured by all property
owned, leased or operated by the Company in the United States excluding any
real property owned by the Company and, at September 30, 2009, also
excluded any intellectual property owned by the Company unless availability was
less than or equal to $17.5 million. The
Facility contains customary covenants which may limit the Companys ability to
incur debt; engage in mergers and consolidations; make restricted payments
(including dividends); sell certain assets; and make investments. The Company
may make restricted payments (including dividends) as long as availability
equals or exceeds the greater of (i) 25% of the aggregate commitment or (ii) $12
million. If the average monthly
availability is less than the greater of (i) 15% of the aggregate
commitment and (ii) $9 million, the Company is also required to meet a
fixed charge coverage ratio financial covenant which may not be less than 1 to
1 for any period of four consecutive fiscal quarters. The Facility also
contains customary borrowing conditions and events of default, the occurrence
of which would entitle the lenders to accelerate the maturity of any
outstanding borrowings and terminate their commitment to make future loans.
The Company has not drawn any cash
advances against the facility, and has no plans to do so. At September 30, 2009, after excluding
the $12.5 million we had utilized in letters of credit, remaining availability
under the revolver totaled $27.5 million subject to limitations set forth in
the agreement noted above. We are in compliance with the terms and conditions
of the agreement and as a result, the coverage charge ratio, or other
restricted payment limitations did not apply.
As of September 30, 2009, we are in compliance with all covenants
of our credit facility.
On October 23, 2009, the Company
amended the revolving credit facility, increasing the line by $20 million, with
total borrowing under the agreement (subject to borrowing base availability and
limitations set forth in the agreement noted above) of up to $60 million. The
amended facility is secured by all assets owned, leased or operated by the
Company in the United States including intellectual property, other than real
estate owned by the Company.
In September 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 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. 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.
In June 2009, Moodys Investors
Service lowered our corporate and senior unsecured credit ratings to Ba1 from
Baa3, and Standard & Poors (S&P) lowered our corporate and
senior unsecured credit ratings to BB from BBB-. In November 2009 S&P
lowered our corporate and senior unsecured credit ratings to B+. Both rating
services
29
Table
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pointed to the Companys depressed
operating performance due to lower consumer spending and a tough retail
environment as reasons for the downgrades.
While the change in our credit rating had no impact on our existing
credit facilities, the S&P rating, if not improved to investment grade by March 2010,
the issuer of our private label
credit cards has a right to demand a
standby letter of credit of up to $12 million, which would reduce availability
under the revolving credit agreement. It does not appear likely that the
S&P rating will improve to investment grade prior to March 2010. The Company believes it has sufficient cash
and access to credit (including its ability to expand the $40 million credit
facility to $60 million) to fund operations and growth plans.
A summary of net cash
provided by (used in) operating, investing, and financing activities for the
three month periods ended September 30, 2009 and 2008 is provided below
(in millions):
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2009
|
|
2008
|
|
Operating Activities
|
|
|
|
|
|
Net income plus
depreciation and amortization
|
|
$
|
(0.9
|
)
|
$
|
13.7
|
|
Working capital
|
|
22.1
|
|
9.0
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
|
|
|
Other (non-cash items,
long-term assets and liabilities)
|
|
(4.2
|
)
|
(4.6
|
)
|
Total provided by operating
activities
|
|
$
|
17.0
|
|
$
|
18.1
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
Capital expenditures
|
|
$
|
(2.5
|
)
|
$
|
(11.1
|
)
|
Acquisitions
|
|
|
|
(0.4
|
)
|
Asset sales
|
|
5.9
|
|
5.7
|
|
Other
|
|
|
|
(0.2
|
)
|
Total provided by (used in)
investing activities
|
|
$
|
3.4
|
|
$
|
(6.0
|
)
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
Issuances of common stock
|
|
|
|
|
|
Purchases of company stock
|
|
|
|
|
|
Payment of dividends
|
|
(1.5
|
)
|
(6.3
|
)
|
Payment of deferred
financing costs
|
|
|
|
|
|
Excess tax benefits from
share-based payment arrangements
|
|
|
|
|
|
Total provided by (used in)
financing activities
|
|
$
|
(1.5
|
)
|
$
|
(6.3
|
)
|
Operating
Activities
As compared to the
same period in fiscal year 2009, cash provided by operating activities
decreased $1.1 million mostly because of the $21.0 million decrease in net
income (partially offset by $6.6 million in depreciation charges due to
restructuring activities). Cash generated
from working capital (accounts receivable, inventories, prepaid and other
current assets, customer deposits, payables, accrued expenses, and other
current liabilities) increased cash by $13.1 million, largely from inventory
reduction initiatives taken, income tax refunds, and an increase in
customer deposits, offset by decreases in
accrued expenses. The $0.4 million in
cash generated from other items was largely a result of restructuring charges,
partially offset by a net increase in deferred tax benefits.
Investing Activities
As compared to the
same period in fiscal year 2009, cash used in investing activities decreased
$9.4 million during the three months ended September 30, 2009 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.
30
Table
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Financing Activities
As compared to the
same period in fiscal year 2009, cash used in financing activities decreased
$4.8 million during the three months ended September 30, 2009, primarily
as a result of a decrease in dividend payments.
The Company has continuously paid dividends every quarter since
1996. On July 21, 2009, the Board
declared a dividend of $0.05 per common share, payable on October 26,
2009, to shareholders of record as of October 9, 2009. If adverse economic conditions continue, the
Company may further reduce our quarterly dividends.
As of September 30,
2009, our outstanding debt totaled $203.2 million, the current and long-term
portions of which amounted to less than $0.1 million and $203.1 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 fiscal 2010, $3.9 million in fiscal 2011 and less than
$0.1 million in fiscal 2012 and 2013.
The balance of our long-term debt ($199.2 million) matures in fiscal
years 2014 and thereafter.
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/A for the year
ended June 30, 2009 as filed with the Securities and Exchange Commission
on August 27, 2009.
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, 2009, we had working capital of $133.8 million
and a current ratio of 2.1 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.
There were no
repurchases during the three months ended September 30, 2009 and
2008. As of September 30, 2009, 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.
31
Table
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Retailer-Related Guarantees
Independent
Retailer Credit Facility
On June 11,
2009, we obligated ourselves, on behalf of one of our independent retailers,
with respect to a $0.5 million credit facility (the
Amended
Credit Facility
). The Company had previously guaranteed
on April 9, 2009, on behalf of the independent retailer, a $0.9 million
credit facility (the Credit Facility).
This obligation requires us, in the event of the retailers default
under the Amended Credit Facility, to repurchase the retailers inventory,
applying such purchase price to the retailers outstanding indebtedness under
the Amended Credit Facility. Our obligation remains in effect for the life of
the term loan. The agreement expires in April 2011. 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 Amended 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, 2009
, the amount
outstanding under the Amended Credit Facility totaled approximately $0.5
million. Based on the underlying
creditworthiness of the respective retailer, we believe this obligation will
expire without requiring funding by us. Our
non-contingent obligations under this arrangement as a result of modifications
made to the Credit Facility subsequent to January 1, 2003 are not
material.
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 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
32
Table
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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 2009, our product
warranty liability totaled $0.9 million.
Business
Outlook
Stresses in the U.S.
economy from continued high unemployment, volatile capital markets, depressed
housing prices and tight consumer spending continue to have a negative impact
on our business. While we remain
optimistic about our long term outlook, current business conditions have only
marginally improved in the quarter ended September 30, 2009. We cannot predict, with any degree of
certainty when these difficult economic conditions will improve meaningfully.
As macro-economic factors
change, 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 may also experience production
difficulties as we consolidate manufacturing plants and convert our case goods
to custom. 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 and
significant manufacturing capacities 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 the Company,
have increased their overseas sourcing activities in an attempt to maintain a
competitive advantage and retain market share. We continue to believe that a
balanced approach to product sourcing, which includes the domestic manufacture
of certain product offerings coupled with the import of other selected
products, provides the greatest degree of flexibility and is the most effective
approach to ensuring that acceptable levels of quality, service and value are
attained.
We believe that our
existing business model which includes: (i) an established brand; (ii) a
comprehensive complement of home decorating solutions and complimentary
interior design services and (iii) a vertically-integrated operating
structure will position us well to take advantage of improved economic
conditions when they occur.
In addition, we believe
that our retail strategy, which involves (i) a continued focus on
providing a wide array of product solutions including custom upholstery and case
goods products and superior customer service coupled with state-of-the-art
technology in our newly launched website, (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, team based structure within our retail network, provides an
opportunity to grow our business when the current difficult economic conditions
improve.
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/A
for the year ended June 30, 2009 as filed with the Securities and Exchange
Commission on August 27, 2009.
33
Table of Contents
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, 2009, 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,
2009 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II
- OTHER INFORMATION
Item 1.
Legal Proceedings
There have been no
material changes to the matters discussed in Part I, Item 3 -
Legal Proceedings
in our Annual Report on Form 10-K/A
for the year ended June 30, 2009 as filed with the Securities and Exchange
Commission on August 27, 2009.
Item 1A.
Risk Factors
There have been no material changes to the market
risks disclosed in our Annual Report on Form 10-K/A for the year ended June 30,
2009 as filed with the Securities and Exchange Commission on August 27,
2009.
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 the Company 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, 2009. The maximum number of shares that may yet be
purchased under the plans or program is 1,567,669 shares.
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.
34
Table
of Contents
Item 6.
Exhibits
Exhibit
Number
|
|
Description
|
10.(g) -3
|
|
Amendment one dated
October 23, 2009 to Credit Agreement dated May 29, 2009
|
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
|
35
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 9, 2009
|
BY:
|
/s/ M. Farooq Kathwari
|
|
Farooq Kathwari
|
|
Chairman, President and
Chief Executive Officer
|
|
(Principal Executive
Officer)
|
|
|
|
|
DATE: November 9,, 2009
|
BY:
|
/s/ David R. Callen
|
|
David R. Callen
|
|
Vice President,
Finance & Treasurer
|
|
(Principal Financial
Officer and Principal Accounting Officer)
|
36
Table of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Exhibit
|
10.(g) -3
|
|
Amendment one dated October 23, 2009 to Credit
Agreement dated May 29, 2009
|
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
|
37
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