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ETH > SEC Filings for ETH > Form 10-Q on 1-May-2013All Recent SEC Filings

Show all filings for ETHAN ALLEN INTERIORS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ETHAN ALLEN INTERIORS INC


1-May-2013

Quarterly Report


Item 2. Management's 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, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and
(ii) our Annual Report on Form 10-K for the year ended June 30, 2012.

Forward-Looking Statements

Management's 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 potential effects of natural disasters affecting our suppliers 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; the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; those matters discussed in Items 1A and 7A of our Annual Report on Form 10-K for the year ended June 30, 2012 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 Company's 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 Company's financial condition and results and that require subjective or complex estimates by management. There have been no material changes with respect to the Company's critical accounting policies from those disclosed in its 2012 Annual Report on Form 10-K filed with the SEC on August 16, 2012.

For the three and nine months ended March 31, 2013 and 2012, the Company has presented selling, general and administrative expenses as a single line on the Consolidated Statements of Comprehensive Income to remove information we believe is not meaningful and to improve comparability with peer companies. Selling expenses, general and administrative expenses, and restructuring and impairment charges had previously been presented separately.

Results of Operations

Our consolidated net sales and income before income taxes have improved year to date by 0.5% and 30.0% respectively over the prior year to date period. This has been driven largely by improvements in our retail segment's net sales and profitability, which have improved for several consecutive quarters as compared to the same prior year periods and has more than offset declines in our wholesale segment's results during the first nine months of fiscal 2013.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

In our prior fiscal year ended June 30, 2012, we replaced the majority of the prototype products displayed on our design center floors primarily during the final three quarters of the 2012 fiscal year. This resulted in higher shipments from our wholesale operations, especially during the third quarter of fiscal year 2012. To make room for these products, our retail locations held frequent clearance events and incurred costs to facilitate new floor layouts. These efforts negatively affected retail results in the prior year but benefitted our wholesale business. We believe these product enhancements have positively contributed to our results in the current fiscal year. In our third fiscal quarter ended March 31, 2013, our wholesale shipments were also negatively affected by lower shipments to our international independent retailers, primarily in China. While consumer demand for Ethan Allen products in China grew, our independent retailer had accumulated inventory to support even higher sales and in anticipation of a higher number of design center openings. Our results in the third quarter of fiscal 2013 were also negatively affected by the adverse timing of the Easter and Passover holidays falling in March of 2013 versus April of 2012, and entering the quarter with lower backlogs due to design center temporary closures during Hurricane Sandy in our second quarter of fiscal 2013.

During the first nine months of fiscal 2013 we opened design centers in Montreal, Canada and Brussels, Belgium, initially incurring losses in these startup locations. We also launched www.ethanallen.ca our new multi-lingual website. These are our first company operated design centers in non-English speaking international markets.

We continue to invest significantly in (i) getting our messages across, (ii) the strength of our interior design professionals and management in our retail business, (iii) new technologies across key aspects of our vertically integrated business, and (iv) the ramp up of our North American manufacturing capacity where we manufacture approximately 70% of our products. Our competitive advantages arise from providing high quality products of the finest craftsmanship, offering complimentary design service through an estimated 2,000 motivated interior design professionals network-wide, providing free local delivery, our custom case goods offerings, enhancing our technology in all aspects of the business, and leveraging our vertically integrated structure. Executing against all of these elements helps us achieve our mission of 'Luxury Made Affordable'.

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012

Consolidated revenue for the three months ended March 31, 2013 decreased 4.4% to $168.1 million, from $175.9 million for the three months ended March 31, 2012. The decrease is primarily due to lower shipments to our independent retailer in China.

At March 31, 2013, the Company operated 148 of the 296 global network design centers compared with 149 of the 299 at March 31, 2012. Our global network included 69 design centers in China at the end of both the current quarter and the third quarter of fiscal 2012. Our international net sales were 4.1% and 7.4% of consolidated net sales for the three months ended March 31, 2013 and 2012 respectively, a decrease of $6.1 million, or 47.1%. The majority of our international sales are to our independent retailer in China.

Wholesale revenue for the third quarter of fiscal 2013 decreased 10.7% to $108.1 million from $121.0 million in the prior year comparable period. The main drivers were lower shipments of prototype products and lower shipments to our retailer in China in the current period. Shipments of prototype products in the third quarter of fiscal 2012 had been at relatively high levels as we completed our major fiscal 2012 product enhancement and filled our channel with new products. Orders in the current quarter for our wholesale segment decreased by 6.4% compared to the same period last year.

Retail revenue from Ethan Allen-operated design centers for the three months ended March 31, 2013 increased 0.5% to $132.1 million from $131.4 million for the three months ended March 31, 2012. We believe the increase in retail sales by Ethan Allen-operated design centers is due to (i) our new product introductions, promotional marketing campaigns and the design solutions approach of our interior design professionals, (ii) continued use of both our national television and direct mail media campaigns, (iii) our digital communications to prospective clients, and (iv) the positive effects of continuously repositioning our retail network, partially offset by the timing of the Easter and Passover holidays mentioned previously, and a net decrease of one Ethan Allen-operated design center between March 31, 2012 and March 31, 2013. We ended the current quarter with 148 Ethan Allen-operated design centers.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

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 center sales in their 13th full month of Ethan Allen-owned operations. Ethan Allen-operated design center total written business as well as comparable design center written business decreased 2.4% during the third quarter of fiscal 2013 compared to the comparable quarter of fiscal 2012. The frequency of our promotional events as well as the timing of the end of those events can impact the orders booked during a given quarter.

Gross profit was $91.8 million for the quarter ended March 31, 2013 and $94.3 million in the prior year comparable quarter. Gross margin for the March 31, 2013 quarter was 54.6%, up from 53.6% the prior year quarter. The improvement in gross margin was primarily due to (i) a stronger sell through of retail inventory, releasing profit contained in the retail segment inventory, (ii) a higher proportion of retail net sales to consolidated net sales (79% in the current quarter versus 75% in the prior year quarter), and (iii) operating efficiencies in our manufacturing plants during the quarter including the leverage of our operations in Mexico and Honduras. These factors were partially offset by reduced volume in our wholesale segment.

Operating expenses decreased $3.4 million to $83.1 million from $86.5 million in the prior year quarter due primarily to (i) operating efficiencies in our retail segment due to structural changes, and (ii) our ability to control costs due to our vertically integrated structure. These were partly offset by losses on the sale of vacant retail real estate and costs associated with our retail expansion internationally including new design centers opened in Montreal and Brussels during fiscal 2013.

Operating income and profit margin for the quarter ended March 31, 2013 was $8.7 million, or 5.2% of net sales, an increase of $0.9 million or 11.2% from the prior year quarter's $7.8 million, or 4.4% of net sales. Wholesale operating income for the three months ended March 31, 2013 was $12.8 million, or 11.8% of sales, compared to $18.2 million, or 15.0% of sales, in the prior year comparable quarter. Retail operating loss for the third quarter of fiscal 2013 was $2.3 million, or a negative 1.7% of sales, compared to a loss of $6.5 million, or a negative 5.0% of sales the prior year. Improvements in consolidated operating income were driven primarily by operating efficiencies in our retail segment due to structural changes, partly offset by the reduced net sales in our wholesale segment.

Interest and other miscellaneous income, net decreased slightly to under $0.1 million compared to $0.2 million in the prior year.

Interest and other related financing costs remained consistent with the prior year quarter at $2.2 million.

Income tax expense for the three months ended March 31, 2013 totaled $2.1 million compared to a benefit of $21.8 million for the three months ended March 31, 2012. Our effective tax rate for the current quarter was a 32.2% compared to a negative 378.7% in the prior year quarter. The current quarter effective tax rate primarily includes tax expense on the current quarter's net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain deferred tax assets, partly offset by the recognition of some uncertain tax positions. The prior period effective tax rate primarily includes the benefit from the reversal of valuation allowances, the recognition of certain previously unrecognized tax benefits, partly offset by the tax expense on the previous quarter's net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.

Net income for the three months ended March 31, 2013, was $4.4 million compared to $27.5 million in the prior year comparable period. This resulted in net income per diluted share of $0.15 for the quarter ended March 31, 2013 compared to $0.94 per diluted share for the quarter ended March 31, 2012.

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

Consolidated revenue for the nine months ended March 31, 2013 increased 0.5% to $546.8 million, from $544.1 million for the nine months ended March 31, 2012.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Wholesale revenue for the first nine months of fiscal 2013 decreased 4.8% to $327.7 million from $344.1 million in the prior year comparable period. The prior year net sales benefitted from shipments of prototype products as we implemented a major product enhancement during fiscal 2012. Orders in the current nine months for our wholesale segment decreased by 5.0% compared to the same period last year, primarily due to the phase out in prototype orders in the current year period for new products introduced as part of our fiscal 2012 major product enhancement which had contributed to results in the 2012 fiscal period. Our international net sales were 5.4% and 6.5% of consolidated net sales for the nine months ended March 31, 2013 and 2012 respectively.

Retail revenue from Ethan Allen-operated design centers for the nine months ended March 31, 2013 increased 4.2% to $433.0 million from $415.7 million for the nine months ended March 31, 2012. We believe the increase in retail sales by Ethan Allen-operated design centers is due to (i) our new product introductions, promotional marketing campaigns and the design solutions approach of our interior design professionals, (ii) continued use of both our national television and direct mail media campaigns, (iii) our digital communications to prospective clients, and (iv) the positive effects of continuously repositioning our retail network, partially offset by a net decrease of one Ethan Allen-operated design center between March 31, 2012 and March 31, 2013.

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. Written business of Ethan Allen-operated design centers increased 2.2% while comparable design centers written business increased 1.6% during the nine months ended March 31, 2013 compared to the nine months ended March 31, 2012. The frequency of our promotional events as well as the timing of the end of those events can impact the orders booked during a given quarter.

Gross profit increased 3.3% during the first nine months of fiscal 2013 to $300.0 million (54.9% of net sales) from $290.4 million (53.4% of net sales) in the prior year comparable period. The increase in gross profit was primarily due to improved gross margin rates in our retail business due to efficiencies and improved pricing, and a higher proportion of retail net sales to consolidated net sales (79% in the current year versus 76% in the prior year). Wholesale gross profit was negatively impacted by the reduced production due to reduced need for prototype product in the fiscal 2013 period previously discussed.

Operating expenses increased $1.0 million to $256.0 million in the first nine months of fiscal 2013 from $255.0 million in the prior year comparable period due primarily to variable costs on higher net sales in our retail segment, and higher current fiscal period charges related to real estate and our international expansion, partly offset by operating efficiencies in our retail segment due to structural changes.

Operating income and profit margin for the nine months ended March 31, 2013 was $44.0 million, or 8.0% of net sales, an increase of $8.6 million or 24.3% from the prior year's $35.4 million, or 6.5% of net sales. Wholesale operating income for the nine months ended March 31, 2013 was $37.7 million, or 11.5% of sales, compared to $49.6 million, or 14.4% of sales, in the prior year comparable period. Retail operating income for the first nine months of fiscal 2013 was $4.8 million, or 1.1% of sales, compared to a loss of $10.6 million, or a negative 2.5% of sales the prior year comparable period. Improvements in consolidated operating income were driven primarily by the 4.2% sales growth and operating efficiencies in our retail segment as previously discussed.

Interest and other miscellaneous income, net decreased $0.2 million to $0.2 million compared to $0.4 million in the prior year.

Interest and other related financing costs amounted to $6.6 million in the current year compared to $6.8 million in the prior year comparable period.

Income tax expense for the nine months ended March 31, 2013 totaled $13.3 million compared to a benefit of $13.5 million for the nine months ended March 31, 2012. Our effective tax rate for the current fiscal year period was 35.4% compared to negative 46.6% in the prior year. The current effective tax rate primarily includes tax expense on the current nine months net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain deferred tax assets, partly offset by the recognition of some uncertain tax positions. The prior period effective tax rate primarily includes the benefit from the reversal of valuation allowances, and the recognition of certain previously unrecognized tax benefits, partly offset by the tax expense on the previous quarter's net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Net income for the nine months ended March 31, 2013, was $24.3 million compared to $42.4 million in the prior year comparable period. This resulted in net income per diluted share of $0.83 for the current period compared to $1.46 per diluted share in the prior year period.

Liquidity and Capital Resources

At March 31, 2013, we held unrestricted cash and cash equivalents of $83.6 million, marketable securities of $18.2 million, and restricted cash and investments of $15.4 million. At June 30, 2012, we held unrestricted cash and cash equivalents of $79.7 million, marketable securities of $9.0 million, and restricted cash and investments of $15.4 million. Our principal sources of liquidity include cash and cash equivalents, marketable securities, cash flow from operations, amounts available under our credit facility, and other borrowings.

In September 2005, we issued $200.0 million in ten-year senior unsecured notes due 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 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. During the full fiscal years 2011 and 2012, the Company reduced its Senior Notes by an aggregate face value of $46.6 through unsolicited purchases.

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, 2013 and June 30, 2012, there were $0.6 million of standby letters of credit outstanding 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 $49.4 million at March 31, 2013 and at June 30, 2012 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 March 31, 2013 and June 30, 2012, we were in compliance with all covenants of the Senior Notes and the Facility.


                  ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES


A summary of net cash provided by (used in) operating, investing, and financing
activities for the nine month periods ended March 31, 2013 and 2012 is provided
below (in millions):

                                                               Nine months ended
                                                                   March 31,
                                                                2013         2012
  Operating Activities
  Net income plus depreciation and amortization              $     37.8     $  56.5
  Working capital items                                             2.0       (10.1 )
  Other operating activities                                        4.6       (18.6 )
  Total provided by (used in) operating activities           $     44.4     $  27.8

  Investing Activities
  Capital expenditures and acquisitions                      $    (17.1 )   $ (20.3 )
  Net purchases of marketable securities                           (9.6 )       1.4
  Other investing activities                                        4.5         3.5
  Total provided by (used in) investing activities           $    (22.2 )   $ (15.4 )

  Financing Activities
  Payments on long-term debt and capital lease obligations   $     (0.2 )   $ (12.1 )
  Purchases and retirements of company stock                          -        (0.9 )
  Payment of cash dividends                                       (19.6 )      (6.0 )
  Other financing activities                                        1.4         0.5
  Total provided by (used in) financing activities           $    (18.4 )   $ (18.5 )

Operating Activities

In the first nine months of fiscal 2013, cash of $44.4 million was generated by operating activities, an increase of $16.6 million from the comparable prior fiscal period. The net increase in cash generated from operating activities was largely due to a decrease in inventory in the current fiscal year period of $13.8 million, and an increase of $8.7 million in income before income taxes during fiscal 2013. Net income in fiscal 2012 included a non-cash increase from the reversal of tax valuation and other reserves, which were offset by a non-cash decrease in other operating activities. Other working capital items (defined below) also included normal fluctuations due to timing of sales and orders. Working capital items consist of accounts receivable, inventories, prepaid and other current assets, customer deposits, payables, and accrued expenses and other current liabilities.

Investing Activities

In the first nine months of fiscal 2013, $22.2 million of cash was used in investing activities, which is $6.8 million more cash used than was used during the first nine months of fiscal 2012. More cash was used in fiscal 2013 primarily due to an increase in our net purchases of marketable securities, and to a lesser extent for capital expenditures in the current period for retail real estate and expansion of our manufacturing capacity in Honduras. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

Financing Activities

In the first nine months of fiscal 2013 and fiscal 2012, $18.4 million and $18.5 million, respectively, was used in financing activities. An increase in the payment of cash dividends in the fiscal 2013 period are a result of (i) an increase in the regular quarterly dividend from $.07 per share to $.09 per share which occurred in July 2012, and (ii) the declaration and payment of a special dividend of $0.41 per share in December 2012. In addition to declaring the special dividend in the second quarter, the Board of Directors also accelerated the payment of the quarterly dividend which would normally have occurred in January 2013 to December 2012. The Board of Directors took both of these actions to provide shareholders an opportunity for favorable tax treatment in 2012. This increase in dividends was partly offset by a reduction in our Senior Note buybacks, which were made in fiscal 2012 and not in fiscal 2013. The Company has continuously paid dividends for every quarter since 1996 and we expect to continue to do so as economic conditions and liquidity permit.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

As of March 31, 2013, our outstanding debt totaled $155.3 million, which consists of $153.1 million in Senior Notes which mature in September 2015 (fiscal 2016), and $2.2 million in capital leases which mature at various times from December 2016 through February 2018. The aggregate scheduled maturities of long-term debt for each of the next five fiscal years are $0.5 million in each of fiscal 2014 and fiscal 2015, $153.6 million in fiscal 2016, $0.5 million in fiscal 2017 and $0.2 million in fiscal 2018. At June 30, 2012 our outstanding debt totaled $154.5 million, the current and long-term portions of which amounted to $0.3 million and $154.2 million respectively.

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 - Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended June 30, 2012 as filed with the SEC on August 16, 2012.

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 March 31, 2013, we had working capital of $142.1 million compared to $131.7 million at June 30, 2012, an increase of $10.4 million, or 7.9%. The Company had a current ratio of 2.05 to 1 at March 31, 2013 and 1.87 to 1 at June 30, 2012.

In addition to using available cash to fund changes in working capital, capital expenditures, acquisition activity, the repayment of debt, the payment of dividends, and debt repurchases, we have been authorized by our Board of Directors to repurchase shares of our common stock from time to time, either . . .

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