eth20140331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

 

For the transition period from __________ to __________

 

Commission File Number: 1-11692

 

Ethan Allen Interiors Inc

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1275288

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

Ethan Allen Drive, Danbury, Connecticut

 

            06811

(Address of principal executive offices)

 

       (Zip Code)

 

 

(203) 743-8000

(Registrant's 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     [  ] 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).     [X] Yes      [  ] 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   [  ]

Accelerated filer                     [X]

Non-accelerated filer     [  ]

Smaller reporting company   [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     [ ] Yes     [X] No

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

At April 24, 2014, there were 28,925,735 shares of Class A Common Stock,

par value $.01, outstanding.

 

 
 

 

 

Table of Contents

 

PART I - FINANCIAL INFORMATION

 

 

Item 1. Financial Statements 

 2

 

Consolidated Balance Sheets 

 2

 

Consolidated Statements of Comprehensive Income 

 3

 

Consolidated Statements of Cash Flows 

 4

 

Consolidated Statements of Shareholders’ Equity 

 5

 

Notes toConsolidated Financial Statements 

 6

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

 20

Item 3. Quantitative and Qualitative Disclosures About Market Risk  

 27

Item 4. Controls and Procedures 

 28

 

 

 

 

 

 

PART II - OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

 28

Item 1A. Risk Factors 

 28

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

 29

Item 3. Defaults Upon Senior Securities 

 29

Item 4. Mine Safety Disclosures 

 29

Item 5. Other Information  

 29

Item 6. Exhibits 

 30

SIGNATURES 

 31

 

 
1

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In thousands)

   

March 31, 2014

   

June 30, 2013

 

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 95,804     $ 72,601  

Marketable securities

    20,138       15,529  

Accounts receivable, less allowance for doubtful accounts of $1,284 at March 31, 2014 and $1,230 at June 30, 2013

    16,003       12,277  

Inventories

    145,055       137,256  

Prepaid expenses and other current assets

    20,914       22,907  

Total current assets

    297,914       260,570  

Property, plant and equipment, net

    286,797       291,672  

Goodwill and other intangible assets

    45,128       45,128  

Restricted cash and investments

    8,907       15,433  

Other assets

    6,154       4,482  

Total assets

  $ 644,900     $ 617,285  

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Current liabilities:

               

Current maturities of long-term debt

  $ 496     $ 480  

Customer deposits

    65,200       59,098  

Accounts payable

    24,107       22,995  

Accrued compensation and benefits

    23,442       27,205  

Accrued expenses and other current liabilities

    27,611       23,161  

Total current liabilities

    140,856       132,939  

Long-term debt

    130,513       130,809  

Other long-term liabilities

    20,657       19,180  

Total liabilities

    292,026       282,928  

Shareholders' equity:

               

Class A common stock

    486       486  

Additional paid-in-capital

    365,104       363,938  

Less: Treasury stock (at cost)

    (584,041 )     (584,041 )

Retained earnings

    570,217       553,083  

Accumulated other comprehensive income

    838       684  

Total Ethan Allen Interiors Inc. shareholders' equity

    352,604       334,150  

Noncontrolling interests

    270       207  

Total shareholders' equity

    352,874       334,357  

Total liabilities and shareholders' equity

  $ 644,900     $ 617,285  

 

See accompanying notes to consolidated financial statements. 

 

 
2

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)

 

 

 

   

Three months ended

March 31,

   

Nine months ended

March 31,

 
   

2014

   

2013

   

2014

   

2013

 

Net sales

  $ 173,061     $ 168,144     $ 547,824     $ 546,832  

Cost of sales

    79,931       76,359       249,952       246,827  

Gross profit

    93,130       91,785       297,872       300,005  

Selling, general and administrative expenses

    83,578       83,125       252,526       256,034  

Operating income

    9,552       8,660       45,346       43,971  

Interest and other income

    103       (10 )     228       192  

Interest and other related financing costs

    1,870       2,195       5,614       6,592  

Income before income taxes

    7,785       6,455       39,960       37,571  

Income tax expense

    2,527       2,081       14,113       13,287  

Net income

  $ 5,258     $ 4,374     $ 25,847     $ 24,284  
                                 

Per share data:

                               

Basic earnings per common share:

                               

Net income per basic share

  $ 0.18     $ 0.15     $ 0.89     $ 0.84  

Basic weighted average common shares

    28,920       28,869       28,916       28,850  

Diluted earnings per common share:

                               

Net income per diluted share

  $ 0.18     $ 0.15     $ 0.88     $ 0.83  

Diluted weighted average common shares

    29,271       29,273       29,284       29,213  
                                 

Comprehensive income:

                               

Net income

  $ 5,258     $ 4,374     $ 25,847     $ 24,284  

Other comprehensive income

                               

Currency translation adjustment

    142       300       126       440  

Other

    31       7       91       47  

Other comprehensive income net of tax

    173       307       217       487  

Comprehensive income

  $ 5,431     $ 4,681     $ 26,064     $ 24,771  

 

See accompanying notes to consolidated financial statements. 

 

 
3

 

 

ETHAN ALLEN INTERIORS INC.

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

   

Nine months ended
March 31,

 
   

2014

   

2013

 
Operating activities:            

Net income

  $ 25,847     $ 24,284  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    13,276       13,514  

Compensation expense related to share-based payment awards

    990       1,115  

Provision (benefit) for deferred income taxes

    (1,382 )     597  

Loss on disposal of property, plant and equipment

    2,164       3,696  

Other

    425       172  
                 

Change in operating assets and liabilities, net of effects of acquired businesses:

               

Accounts receivable

    (3,726 )     2,855  

Inventories

    (7,799 )     13,808  

Prepaid and other current assets

    613       2,054  

Customer deposits

    6,102       (6,567 )

Accounts payable

    1,112       (1,899 )

Accrued expenses and other current liabilities

    288       (8,241 )

Other assets and liabilities

    2,109       (943 )

Net cash provided by operating activities

    40,019       44,445  
                 

Investing activities:

               

Proceeds from the disposal of property, plant & equipment

    2,667       3,226  

Change in restricted cash and investments

    6,526       (14 )

Capital expenditures

    (12,588 )     (16,545 )

Acquisitions

    -       (598 )

Purchases of marketable securities

    (17,500 )     (17,547 )

Sales of marketable securities

    12,323       7,990  

Other investing activities

    253       1,333  

Net cash used in investing activities

    (8,319 )     (22,155 )
                 

Financing activities:

               

Payments on long-term debt and capital lease obligations

    (358 )     (187 )

Payment of cash dividends

    (8,399 )     (19,617 )

Other financing activities

    314       1,423  

Net cash used in financing activities

    (8,443 )     (18,381 )

Effect of exchange rate changes on cash

    (54 )     15  

Net increase (decrease) in cash & cash equivalents

    23,203       3,924  

Cash & cash equivalents at beginning of period

    72,601       79,721  

Cash & cash equivalents at end of period

  $ 95,804     $ 83,645  

 

See accompanying notes to consolidated financial statements.

 

 
4

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity

Nine Months Ended March 31, 2014

(Unaudited)

(In thousands)

 

 

   

Common Stock

   

Additional Paid-in Capital

   

Treasury Stock

   

Accumulated Other Comprehensive Income

   

Retained Earnings

   

Non-Controlling Interests

   

Total

 

Balance at June 30, 2013

  $ 486     $ 363,938     $ (584,041 )   $ 684     $ 553,083     $ 207     $ 334,357  
                                                         

Stock issued on share-based awards

    -       263       -       -       -       -       263  
                                                         

Compensation expense associated with share-based awards

    -       990       -       -       -       -       990  
                                                         

Tax benefit associated with exercise of share based awards

    -       (87 )     -       -       -       -       (87 )
                                                         

Dividends declared on common stock

    -       -       -       -       (8,713 )     -       (8,713 )
                                                         

Comprehensive income

    -       -       -       154       25,847       63       26,064  

Balance at March 31, 2014

  $ 486     $ 365,104     $ (584,041 )   $ 838     $ 570,217     $ 270     $ 352,874  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(1)

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 Global’s 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 Global’s 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. 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.

 

Our consolidated financial statements include the accounts of an entity in which we are a majority shareholder and have the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statement of Comprehensive Income within interest and other income, net.

 

(2)

Interim Financial Presentation

 

In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2014 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended June 30, 2013.

 

(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; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are not normal and are non-recurring 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 Company's consolidated effective income tax rate can change significantly on a quarterly basis.

 

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 in such domestic and foreign jurisdictions. As of March 31, 2014, the Company and certain subsidiaries are currently under audit in the U.S. from 2006 through 2012. 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. It is reasonably possible that some of these audits may be completed during the next twelve months. It is reasonable to expect that various issues relating to uncertain tax benefits will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

 

The Company’s consolidated effective tax rate was 32.5% and 35.3% for the three and nine months ended March 31, 2014, respectively, and 32.2% and 35.4% for the three and nine months ended March 31, 2013, respectively. The current year effective tax rate primarily includes tax expense on net income, additions to unrecognized tax benefits, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain retail segment deferred tax assets. The prior year effective tax rate primarily includes the tax expense on net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain retail segment deferred tax assets, partly offset by the recognition of some uncertain tax positions.

  

 
6

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(4)

Restricted Cash and Investments

 

At March 31, 2014 and June 30, 2013, we held $8.9 million and $15.4 million respectively, of restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our workmen’s compensation and other insurance and for the benefit of the issuer of our private label credit card. These funds can be invested in high quality money market mutual funds, U.S. Treasuries and U.S. Government agency fixed income instruments, and cannot be withdrawn without the prior written consent of the secured party. These assets are carried at cost, which approximates market value and are classified as long-term assets because they are not expected to be used within one year to fund operations. See also Note 12, “Fair Value Measurements". In January 2014 under the terms of the amended agreement with our provider of our private label credit card program, $6 million of restricted cash was released and moved into the Company’s operating cash accounts.

 

(5)

Marketable Securities

 

At March 31, 2014 and June 30, 2013, the Company held marketable securities of $20.1 million and $15.5 million respectively, classified as current assets, consisting of U.S. municipal and corporate bonds with maturities ranging from less than one year to less than two years, which were rated A/A2 or better by the rating services Standard & Poors (“S&P”) and Moodys Investors Service (“Moodys”) respectively. There were no material realized or unrealized gains or losses for the nine months ended March 31, 2014 and March 31, 2013. We do not believe there are any impairments considered to be other than temporary at March 31, 2014. See also Note 12, “Fair Value Measurements".

 

(6)

Inventories

 

Inventories at March 31, 2014 and June 30, 2013 are summarized as follows (in thousands):

 

   

March 31,

2014

   

June 30,

2013

 
                 

Finished goods

  $ 117,106     $ 110,220  

Work in process

    8,601       6,961  

Raw materials

    22,152       22,787  

Valuation allowance

    (2,804 )     (2,712 )
    $ 145,055     $ 137,256  

 

(7)

Borrowings

 

Total debt obligations at March 31, 2014 and June 30, 2013 consist of the following (in thousands):

 

 

   

March 31,

2014

   

June 30,

2013

 

5.375% Senior Notes due 2015

  $ 129,230     $ 129,152  

Capital leases and other

    1,779       2,137  

Total debt

    131,009       131,289  

Less current maturities

    496       480  

Total long-term debt

  $ 130,513     $ 130,809  

 

 
7

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

In September 2005, we issued $200.0 million in ten-year senior unsecured notes due October 1, 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We have used the net proceeds of $198.4 million to improve our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. In fiscal years 2011 through 2013, the Company repurchased an aggregate $70.6 million of the Senior Notes in several unsolicited transactions.

 

We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). We have not had any revolving loans under the Facility at any time. At March 31, 2014 and June 30, 2013, there was $0.7 million and $0.6 million of standby letters of credit outstanding, respectively, under the Facility. The Facility is subject to borrowing base availability and includes a right for the Company to increase the total facility to $100 million subject to certain conditions. 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 contains customary covenants which may limit the Company’s ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. Remaining availability under the Facility totaled $49.3 million at March 31, 2014 and $49.4 million at June 30, 2013 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.

 

At both March 31, 2014 and June 30, 2013, we were in compliance with all covenants of the Senior Notes and the Facility.

 

(8)

Litigation

 

We are routinely involved in various investigations or as a defendant in litigation, in the ordinary course of business. We are also subject to various federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such investigations and proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.

 

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. 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. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.

 

Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that the likelihood is remote that any existing claims or proceedings will have a material adverse effect on our financial position, results of operations or cash flows.

  

 
8

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(9)

Share-Based Compensation

 

During the nine months ended March 31, 2014, the Company awarded options to purchase 172,499 shares of our common stock, including 149,000 shares which vest based upon the financial performance of the Company. Awarded options had a weighted average exercise price per share of $25.83, a weighted average grant date fair value of $11.42 and vest over three to five years. During the nine months ended March 31, 2014, options covering 452,864 shares of common stock were cancelled, primarily due to the expiration of their 10 year terms. At March 31, 2014, there are 1,348,678 shares of common stock available for future issuance pursuant to the 1992 Stock Option Plan.

 

(10)

Earnings Per Share

 

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

 

 

   

Three months ended

March 31,

   

Nine months ended

March 31,

 
   

2014

   

2013

   

2014

   

2013

 

Weighted average common shares outstanding for basic calculation

    28,920       28,869       28,916       28,850  

Effect of dilutive stock options and other share-based awards

    351       404       368       363  

Weighted average common shares outstanding adjusted for dilution calculation

    29,271       29,273       29,284       29,213  

 

 

As of March 31, 2014 and 2013, stock options to purchase 620,392 and 885,600 common shares, respectively, were excluded from the respective diluted earnings per share calculations because their impact was anti-dilutive.

 

(11)

Accumulated Other Comprehensive Income

 

 

The following table sets forth the activity in accumulated other comprehensive income for the year to date period ended March 31, 2014 (in thousands):

 

   

Foreign currency translation adjustments

   

Derivative instruments

   

Unrealized gains and losses on investments

   

Total

 

Balance June 30, 2013

  $ 747     $ (69 )   $ 6     $ 684  

Changes before reclassifications

  $ 126     $ -     $ 5     $ 131  

Amounts reclassified from accumulated other comprehensive income

  $ -     $ 23     $ -     $ 23  

Current period other comprehensive income

  $ 126     $ 23     $ 5     $ 154  

Balance March 31, 2014

  $ 873     $ (46 )   $ 11     $ 838  

 

Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time. The derivative instruments are reclassified to interest expense in our consolidated statements of operations.

  

 
9

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(12)

Fair Value Measurements

 

We determine fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants use in pricing the asset or liability, and not on assumptions specific to the Company. In addition, the fair value of liabilities includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in one of three levels, 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 management’s 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.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following table presents our assets and liabilities measured at fair value on a recurring basis at March 31, 2014 and June 30, 2013 (in thousands):

 

March 31, 2014

 
   

Level 1

   

Level 2

   

Level 3

   

Balance

 

Cash equivalents

  $ 104,711     $ -     $ -     $ 104,711  

Available-for-sale securities

    -       20,138       -       20,138  

Total

  $ 104,711     $ 20,138     $ -     $ 124,849  

 

 

 

June 30, 2013

 
   

Level 1

   

Level 2

   

Level 3

   

Balance

 

Cash equivalents

  $ 88,034     $ -     $ -     $ 88,034  

Available-for-sale securities

    -       15,529       -       15,529  

Total

  $ 88,034     $ 15,529     $ -     $ 103,563  

 

Cash equivalents consist of money market accounts and mutual funds in U.S. government and agency fixed income securities. We use quoted prices in active markets for identical assets or liabilities to determine fair value. There were no transfers between level 1 and level 2 during the first nine months of fiscal 2014 or fiscal 2013. At March 31, 2014 and June 30, 2013, $8.9 million and $15.4 million respectively, of the cash equivalents were restricted, and classified as long-term assets.

 

At March 31, 2014, available-for-sale securities consist of $20.1 million in U.S. municipal bonds, and at June 30, 2013, available-for-sale securities consisted of $14.0 million in U.S. municipal bonds and $1.5 million of corporate bonds, all with maturities of less than two years. The bonds are rated A/A2 or better by S&P/Moodys respectively. As of March 31, 2014 and June 30, 2013, there were no material gross unrealized gains or losses on available-for-sale securities.

  

 
10

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


As of March 31, 2014 and June 30, 2013, the contractual maturities of our available-for-sale securities were as follows:

 

March 31, 2014

 
   

Cost

   

Estimated Fair Value

 

Due in one year or less

  $ 14,411     $ 14,304  

Due after one year through five years

  $ 5,823     $ 5,834  

 

June 30, 2013

 
   

Cost

   

Estimated Fair Value

 

Due in one year or less

  $ 13,213     $ 13,067  

Due after one year through five years

  $ 2,463     $ 2,462  

 

No investments have been in a continuous loss position for more than one year, and no other-than-temporary impairments were recognized. See also Note 4, "Restricted Cash and Investments" and Note 5, "Marketable Securities".

 

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

 

We measure certain assets at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be impaired. During the nine months ended March 31, 2014, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis and during the nine months ended March 31, 2013 we recorded a $1.6 million impairment relating to real estate assets held for sale.

 

(13)

Segment Information

 

Our operations are classified into two operating segments: wholesale and retail. These operating segments represent strategic business areas of our vertically integrated business which, although they operate separately and provide their own distinctive services, enable us to more efficiently control the quality and cost of 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 operated and Ethan Allen operated 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 operated 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 operated 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.

  

 
11

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


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). The allocation of retail sales by product line is reasonably similar to that of the wholesale segment. A breakdown of wholesale sales by these product lines for the three and nine months ended March 31, 2014 and 2013 is provided as follows:

 

   

Three months ended

March 31,

   

Nine months ended

March 31,

 
   

2014

   

2013

   

2014

   

2013

 

Case Goods

    38 %     36 %     35 %     37 %

Upholstered Products

    46 %     48 %     48 %     48 %

Home Accessories and Other

    16 %     16 %     17 %     15 %
      100 %     100 %     100 %     100 %

 

Segment information for the three and nine months ended March 31, 2014 and 2013 is provided below (in thousands):

 

   

Three months ended

March 31,

   

Nine months ended

March 31,

 
   

2014

   

2013

   

2014

   

2013

 

Net sales:

                               

Wholesale segment

  $ 111,143     $ 108,101     $ 337,474     $ 327,690  

Retail segment

    131,813       132,056       425,136       432,962  

Elimination of inter-company sales

    (69,895 )     (72,013 )     (214,786 )     (213,820 )

Consolidated Total

  $ 173,061     $ 168,144     $ 547,824     $ 546,832  
                                 

Operating income:

                               

Wholesale segment

  $ 13,009     $ 12,754     $ 43,507     $ 37,651  

Retail segment

    (1,591 )     (2,283 )     2,411       4,782  

Adjustment of inter-company profit (1)

    (1,866 )     (1,811 )     (572 )     1,538  

Consolidated Total

  $ 9,552     $ 8,660     $ 45,346     $ 43,971  
                                 

Depreciation & Amortization:

                               

Wholesale segment

  $ 2,018     $ 2,135     $ 5,824     $ 6,116  

Retail segment

    2,559       2,413       7,452       7,398  

Consolidated Total

  $ 4,577     $ 4,548     $ 13,276     $ 13,514  
                                 

Capital expenditures:

                               

Wholesale segment

  $ 1,991     $ 1,381     $ 6,483     $ 6,024  

Retail segment

    2,039       1,599       6,105       10,521  

Acquisitions

    -       -       -       598  

Consolidated Total

  $ 4,030     $ 2,980     $ 12,588     $ 17,143  

 

 

   

March 31,

2014

   

June 30,

2013

 

Total Assets:

               

Wholesale segment

  $ 323,198     $ 291,942  

Retail segment

    352,405       355,233  

Inventory profit elimination (2)

    (30,703 )     (29,890 )

Consolidated Total

  $ 644,900     $ 617,285  

  

 

(1)

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

 

(2)

Represents the wholesale profit contained in the retail segment inventory that has not yet been realized.
These profits are realized when the related inventory is sold.


 
12

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated design centers. The number of international design centers, and the related net sales as a percent of our consolidated net sales is shown in the following table.
 

 

   

Nine months ended March 31,

 
   

2014

   

2013

 

Independent design centers

    90       86  

Company operated design centers

    8       7  

Total international design centers

    98       93  

Percentage of consolidated net sales

    10.3 %     9.3 %

 

 

(14)

Recently Issued Accounting Pronouncements

 

There have been no recently issued accounting pronouncements during the nine months ended March 31, 2014 or impending accounting changes that are expected to have a material effect on the Company’s financial statements.

 

(15)

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. Our other subsidiaries which are not guarantors are called the "Non-Guarantors".

  

 
13

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


The following tables set forth the condensed consolidating balance sheets as of March 31, 2014 and June 30, 2013, the condensed consolidating statements of operations for the three and nine months ended March 31, 2014 and 2013, and the condensed consolidating statements of cash flows for the nine months ended March 31, 2014 and 2013 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.

 

CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

March 31, 2014

   

Parent

   

Issuer

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 

Assets

                                               

Current assets:

                                               

Cash and cash equivalents

  $ -     $ 79,893     $ 12,407     $ 3,504     $ -     $ 95,804  

Marketable securities

    -       20,138       -       -       -       20,138  

Accounts receivable, net

    -       15,743       255       5       -       16,003  

Inventories

    -       -       169,518       6,240       (30,703 )     145,055  

Prepaid expenses and other current assets

    -       5,199       13,758       1,957       -       20,914  

Intercompany receivables

    -       838,999       315,744       (3,453 )     (1,151,290 )     -  

Total current assets

    -       959,972       511,682       8,253       (1,181,993 )     297,914  

Property, plant and equipment, net

    -       8,845       260,872       17,080       -       286,797  

Goodwill and other intangible assets

    -       37,905       7,223       -       -       45,128  

Restricted cash and investments

    -       8,907       -       -       -       8,907  

Other assets

    -       3,893       1,483       778       -       6,154  

Investment in affiliated companies

    713,554       (113,256 )     -       -       (600,298 )     -  

Total assets

  $ 713,554     $ 906,266     $ 781,260     $ 26,111     $ (1,782,291 )   $ 644,900  

Liabilities and Shareholders’ Equity

                                               

Current liabilities:

                                               

Current maturities of long-term debt

  $ -     $ -     $ 496     $ -     $ -     $ 496  

Customer deposits

    -       -       61,582       3,618       -       65,200  

Accounts payable

    -       5,352       18,237       518       -       24,107  

Accrued expenses and other current liabilities

    3,039       32,199       14,400       1,415       -       51,053  

Intercompany payables

    357,641       (8,468 )     773,829       28,288       (1,151,290 )     -  

Total current liabilities

    360,680       29,083       868,544       33,839       (1,151,290 )     140,856  

Long-term debt

    -       129,230       1,283       -       -       130,513  

Other long-term liabilities

    -       4,181       16,032       444       -       20,657  

Total liabilities

    360,680       162,494       885,859       34,283       (1,151,290 )     292,026  

Shareholders’ equity

    352,874       743,772       (104,599 )     (8,172 )     (631,001 )     352,874  

Total liabilities and shareholders’ equity

  $ 713,554     $ 906,266     $ 781,260     $ 26,111     $ (1,782,291 )   $ 644,900  

 

 
14

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

June 30, 2013

   

Parent

   

Issuer

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 

Assets

                                               

Current assets:

                                               

Cash and cash equivalents

  $ -     $ 57,307     $ 12,463     $ 2,831     $ -     $ 72,601  

Marketable securities

    -       15,529       -       -       -       15,529  

Accounts receivable, net

    -       12,061       212       4       -       12,277  

Inventories

    -       -       161,683       5,463       (29,890 )     137,256  

Prepaid expenses and other current assets

    -       9,882       11,275       1,750       -       22,907  

Intercompany receivables

    -       831,238       302,577       (3,726 )     (1,130,089 )     -  

Total current assets

    -       926,017       488,210       6,322       (1,159,979 )     260,570  

Property, plant and equipment, net

    -       9,432       265,698       16,542       -       291,672  

Goodwill and other intangible assets

    -       37,905       7,223       -       -       45,128  

Restricted cash and investments

    -       15,433       -       -       -       15,433  

Other assets

    -       2,188       1,488       806       -       4,482  

Investment in affiliated companies

    686,451       (111,647 )     -       -       (574,804 )     -  

Total assets

  $ 686,451     $ 879,328     $ 762,619     $ 23,670     $ (1,734,783 )   $ 617,285  

Liabilities and Shareholders’ Equity

                                               

Current liabilities:

                                               

Current maturities of long-term debt

  $ -     $ -     $ 480     $ -     $ -     $ 480  

Customer deposits

    -       -       56,030       3,068       -       59,098  

Accounts payable

    -       7,390       15,097       508       -       22,995  

Accrued expenses and other current liabilities

    2,720       29,710       16,683       1,253       -       50,366  

Intercompany payables

    349,374       (7,460 )     766,039       22,136       (1,130,089 )     -  

Total current liabilities

    352,094       29,640       854,329       26,965       (1,130,089 )     132,939  

Long-term debt

    -       129,152       1,657       -       -       130,809  

Other long-term liabilities

    -       4,492       14,355       333       -       19,180  

Total liabilities

    352,094       163,284       870,341       27,298       (1,130,089 )     282,928  

Shareholders’ equity

    334,357       716,044       (107,722 )     (3,628 )     (604,694 )     334,357  

Total liabilities and shareholders’ equity

  $ 686,451     $ 879,328     $ 762,619     $ 23,670     $ (1,734,783 )   $ 617,285  

  

 
15

 

 

 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In thousands)

Three months ended March 31, 2014

 
                                                 
   

Parent

   

Issuer

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 

Net sales

  $ -     $ 109,795     $ 185,221     $ 9,655     $ (131,610 )   $ 173,061  

Cost of sales

    -       83,285       119,365       6,721       (129,440 )     79,931  

Gross profit

    -       26,510       65,856       2,934       (2,170 )     93,130  

Selling, general and administrative expenses

    45       12,939       65,866       4,728       -       83,578  

Operating income (loss)

    (45 )     13,571       (10 )     (1,794 )     (2,170 )     9,552  

Interest and other income (expense)

    5,303       (1,932 )     (30 )     31       (3,269 )     103  

Interest and other related financing costs

    -       1,850       20       -       -       1,870  

Income (loss) before income taxes

    5,258       9,789       (60 )     (1,763 )     (5,439 )     7,785  

Income tax expense

    -       2,316       130       81       -       2,527  

Net income/(loss)

  $ 5,258     $ 7,473     $ (190 )   $ (1,844 )   $ (5,439 )   $ 5,258  

 

 

Three months ended March 31, 2013

 
                                                 
   

Parent

   

Issuer

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 

Net sales

  $ -     $ 108,595     $ 188,589     $ 9,311     $ (138,351 )   $ 168,144  

Cost of sales

    -       81,631       124,977       5,959       (136,208 )     76,359  

Gross profit

    -       26,964       63,612       3,352       (2,143 )     91,785  

Selling, general and administrative expenses

    45       12,817       65,310       4,953       -       83,125  

Operating income (loss)

    (45 )     14,147       (1,698 )     (1,601 )     (2,143 )     8,660  

Interest and other income (expense)

    4,419       (2,404 )     5       (131 )     (1,899 )     (10 )

Interest and other related financing costs

    -       2,180       15       -       -       2,195  

Income (loss) before income taxes

    4,374       9,563       (1,708 )     (1,732 )     (4,042 )     6,455  

Income tax expense

    -       3,001       (943 )     23       -       2,081  

Net income/(loss)

  $ 4,374     $ 6,562     $ (765 )   $ (1,755 )   $ (4,042 )   $ 4,374  

 

 
16

 

 

 ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In thousands)

Nine months ended March 31, 2014

 
                                                 
   

Parent

   

Issuer

   

Guarantors

   

Non-Guarantors

   

Eliminations

   

Consolidated

 

Net sales

  $ -     $ 332,623     $ 587,149     $ 30,596     $ (402,544 )   $ 547,824  

Cost of sales

    -       252,701       378,522       20,460       (401,731 )     249,952  

Gross profit

    -       79,922       208,627       10,136       (813 )     297,872  

Selling, general and administrative expenses

    135       34,481       203,205       14,705       -       252,526  

Operating income (loss)

    (135 )     45,441       5,422       (4,569 )     (813 )     45,346  

Interest and other income (expense)

    25,982       (1,302 )     (73 )     (7 )     (24,372 )     228  

Interest and other related financing costs

    -       5,551       63       -       -       5,614  

Income (loss) before income taxes

    25,847       38,588       5,286       (4,576 )     (25,185 )     39,960  

Income tax expense

    -       11,793     &nb