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ETH > SEC Filings for ETH > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for ETHAN ALLEN INTERIORS INC

Form 10-Q for ETHAN ALLEN INTERIORS INC


1-May-2014

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, 2013.

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, 2013 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 2013 Annual Report on Form 10-K filed with the SEC on August 16, 2013.

Overview

We are a leading interior design company and manufacturer and retailer of quality home furnishings. Founded over 80 years ago, today we're a leading international home fashion brand doing business throughout North America, Europe, Asia and the Middle East. We are vertically integrated from design through delivery, affording our clientele a value equation of style, quality and price that is unique to the industry. We offer free interior design service to our clients and sell a full range of furniture products and decorative accessories through ethanallen.com and a network of approximately 300 design centers in the United States and abroad. The design centers represent a mix of independent licensees and our own Company operated retail segment. We own and operate eight manufacturing facilities including five manufacturing plants and one sawmill in the United States and a manufacturing plant in each of Mexico and Honduras.

Our strong and innovative marketing campaigns continue to expand our reach to more consumers. We continue to invest significantly in (i) getting our messages across with strong advertising and marketing campaigns, (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.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Our competitive advantages arise from:

? providing fashionable high quality products of the finest craftsmanship,

? offering complimentary design service through an estimated 2,000 motivated interior design professionals network-wide,

? our wide array of custom product offerings across our upholstery, case goods, and accessory product categories,

? enhancing our technology in all aspects of the business, and

? leveraging our vertically integrated structure.

We continue to make considerable investments to strengthen the level of service, professionalism, and interior design competence, as well as to improve the efficiency of our retail operations. We believe that over time, we will continue to benefit from (i) continuous repositioning of our retail network, (ii) frequent new product introductions, (iii) new and innovative marketing promotions and effective use of targeted advertising media, and (iv) continued use of the latest technology coupled with personal service from our interior design professionals. We believe our network of professionally trained interior design professionals differentiates us significantly from others in our industry.

Results of Operations

In the third quarter of fiscal 2014, consolidated net sales of $173.1 million increased 2.9% compared to the third quarter of fiscal 2013. During the same period, consolidated operating margin increased to 5.5% compared to 5.2%, and net earnings improved to $0.18 from $0.15 per diluted share.

The severe winter weather negatively impacted sales for the third quarter of fiscal 2014, notably during the January and February months in the mid-Atlantic, Northeast and North Central United States. Despite the weather, sales improved in our wholesale segment, where net sales of $111.1 million increased 2.8% during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The retail segment net sales were down 0.2% for the three months ended March 31, 2014 at $131.8 million compared to $132.1 million in the third quarter of fiscal 2013.

The wholesale gross margin improved slightly for the third quarter of fiscal 2014 from the third quarter of fiscal 2013, and the retail gross margin for the third quarter of fiscal 2014 remained unchanged from the third quarter of fiscal 2013. The ratio of retail segment net sales to consolidated net sales decreased during the third quarter (76.2% compared to 78.5% the prior year), which impacted the consolidated gross margin. The consolidated gross margin of 53.8% for the third quarter of fiscal 2014 was a decrease compared to 54.6% in the third quarter of fiscal 2013 as a result. This gross margin change was offset by a decrease in operating expenses as a percentage of total net sales.

Written orders booked by the retail segment in the third quarter of fiscal 2014 were also impacted by the severe winter weather. Written orders booked decreased 2.4% for the fiscal 2014 third quarter compared to the third quarter of fiscal 2013, including a comparable design center written orders booked decrease of 0.5%. For the nine months year to date fiscal 2014 period the retail segment written orders booked are up 1.7% compared to nine months year to date fiscal 2013, with comparable design center written orders booked growth of 3.9%. The retail segment undelivered backlog at March 31, 2014 is up 10.1% from March 31, 2013.

We measure the performance of our retail design centers based on net sales and written orders booked on a comparable period to period basis. 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. 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.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Third Quarter Ended March 31, 2014 Compared to Third Quarter Ended March 31, 2013

Consolidated net sales for the third quarter of fiscal 2014 increased 2.9% to $173.1 million, from $168.1 million in the third quarter of fiscal 2013. The increase is due to increased net sales in our wholesale segment discussed below.

At March 31, 2014, the Company operated 145 of the 296 global network design centers compared with 148 of the 296 at March 31, 2013. Our global network included 70 design centers in China at the end of the current quarter compared to 69 at the end of the third quarter of fiscal 2013. Our international net sales, including those of the Company operated retail segment, were approximately 11.5% of consolidated net sales for the third quarter of fiscal 2014 and 7.9% for the third quarter of fiscal 2013.

Wholesale net sales for the third quarter of fiscal 2014 increased 2.8% to $111.1 million from $108.1 million in the third quarter of fiscal 2013, supported by increased shipments to our international retailers. Our wholesale undelivered backlog at the end of the third quarter of fiscal 2014 was significantly higher than one year ago.

Retail net sales from the Company's retail segment for the third quarter of fiscal 2014 decreased 0.2% to $131.8 million from $132.1 million for the third quarter of fiscal 2013. The Company believes sales during the third quarter of fiscal 2014 were negatively impacted by the severe winter weather primarily in the mid-Atlantic, Northeast and North Central United States. Also contributing to the sales decrease was the transition of our Houston design centers. In the second quarter of fiscal 2013, we sold two Company operated design centers in Houston to our independent retailer operating in that market, and during the third quarter of fiscal 2013 net sales for the two design centers continued as the remaining order backlog was delivered. We ended the current quarter with 145 Company operated design centers, as compared to 148 at the end of the third quarter of fiscal 2013. Our written business (new orders booked) in the third quarter fiscal 2014 decreased 2.4% while comparable design center written business decreased 0.5% compared to the third quarter of fiscal 2013. At March 31, 2014, the retail undelivered backlog was 10.1% higher than a year ago.

Gross profit was $93.1 million for the third quarter of fiscal 2014, up 1.5% from the $91.8 million in the third quarter of fiscal 2013 due to the growth in sales in our wholesale business. Consolidated gross margin for the third quarter of fiscal 2014 was 53.8%, down from 54.6% for the third quarter of fiscal 2013 due to a lower proportion of retail segment net sales to our consolidated net sales, partly offset by an increase in wholesale gross margin. Retail gross margin remained the same in both periods.

Operating expenses for the third quarter of fiscal 2014 increased $0.5 million or 0.5% to $83.6 million from $83.1 million for the third quarter of fiscal 2013 with no significant changes in costs between the two quarterly periods.

Operating income and profit margin for the third quarter of fiscal 2014 was $9.6 million, or 5.5% of net sales, an increase of $0.9 million or 10.3% from $8.7 million, or 5.2% of net sales for the third quarter of fiscal 2013.

Wholesale operating income for the third quarter of fiscal 2014 was $13.0 million, or 11.7% of sales, compared to $12.8 million, or 11.8% of sales, for the third quarter of fiscal 2013, improving largely due to the increase in sales. Retail operating loss for the third quarter of fiscal 2014 was $1.6 million, or 1. 2% of sales, compared to an operating loss of $2.3 million, or 1.7% of sales for third quarter of fiscal 2013, with the improvement in operating loss margin driven primarily by reduced variable costs on lower retail net sales in the current fiscal quarter, partially offset by startup losses in new markets. During our 2013 fiscal year, the Company's retail segment expanded into new markets in Montreal, Canada and Belgium.

Interest and other income was not material in either the third quarter of the current or prior fiscal year.

Interest and other related financing costs amounted to $1.9 million in the third quarter of fiscal 2014 compared to $2.2 million in the third quarter of fiscal 2013. The $0.3 million reduction resulted from reductions in debt outstanding. Since March 2013, debt has been reduced by $24.0 million through Senior Note repurchases.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Income tax expense for the third quarter of fiscal 2014 totaled $2.5 million compared to $2.1 million for the third quarter of fiscal 2013. Our effective tax rate for the current quarter was 32.5% compared to 32.2% in the prior year quarter. The current quarter effective tax rate primarily includes tax expense on the current quarter's 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 period effective tax rate primarily includes the tax expense on that quarter's 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.

Net income for the third quarter of fiscal 2014, was $5.3 million compared to $4.4 million for the third quarter of fiscal 2013. This resulted in net income per diluted share of $0.18 for the third quarter of fiscal 2014 compared to $0.15 per diluted share for the third quarter of fiscal 2013.

Nine Months Ended March 31, 2014 Compared to Nine Months Ended March 31, 2013

Consolidated net sales for the nine months ended March 31, 2014 increased 0.2% to $547.8 million, from $546.8 million for the nine months ended March 31, 2013. The increase is due to higher shipments in our wholesale segment, which is discussed below.

Our international net sales, including those of the Company operated design centers, were approximately 10.3% of consolidated net sales for the nine months year to date fiscal year 2014 compared to 9.3% in fiscal year 2013 comparable period.

Wholesale net sales for the nine months ended March 31, 2014 increased 3.0% to $337.5 million from $327.7 million in the prior year comparable period. Our wholesale net sales benefitted from higher shipments to our independent retailers worldwide.

Retail net sales from Company operated design centers for the nine months ended March 31, 2014 decreased 1.8% to $425.1 million from $433.0 million for the nine months ended March 31, 2013. We sold two design centers in Houston to our independent retailer in fiscal 2013. At March 31, 2014, there were 145 Company operated design centers as compared to 148 in the prior year. Our written business (new orders booked) generated by our retail division increased 1.7% while comparable design center written business increased 3.9% during the first nine months of fiscal 2014 compared to the comparable period of fiscal 2013.

Gross profit was $297.9 million for the nine months ended March 31, 2014, down 0.7% from the $300.0 million in the prior year comparable period. The decrease was driven by lower net sales and gross margin in our retail segment. Gross margin for the nine months ended March 31, 2014 was 54.4%, down from 54.9% the prior year, due to (i) a greater volume of clearance sales by our retail segment as we prepared for our new product launch which began in October 2013, (ii) a lower proportion of retail division net sales to our consolidated net sales (77.6% compared to 79.2% the prior year), and (iii) a higher proportion of our retail sales with promotional discounts in lieu of full price sales utilizing promotional financing with related program fees. This was partially offset by improved gross margin in our wholesale segment due to increased sales.

Operating expenses for the nine months ended March 31, 2014 decreased $3.5 million or 1.4% to $252.5 million from $256.0 million in the prior year comparable period due primarily to lower charges on vacant real estate in the current fiscal period compared to the prior fiscal period.

Operating income and profit margin for the nine months ended March 31, 2014 was $45.3 million, or 8.3% of net sales, an increase of $1.4 million or 3.1% from the prior year comparable period's $44.0 million, or 8.0% of net sales.

Wholesale operating income for the nine months ended March 31, 2014 was $43.5 million, or 12.9% of sales, compared to $37.7 million, or 11.5% of sales, in the prior year comparable period. Retail operating income for the first nine months of fiscal 2014 was $2.4 million, or 0.6% of sales, compared to $4.8 million, or 1.1% of sales in the prior year comparable period. This decrease was driven primarily by lower retail net sales in fiscal 2014.

Interest and other income remained relatively even with the prior year at $0.2 million for both the nine month periods ended March 31, 2014 and 2013.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Interest and other related financing costs amounted to $5.6 million for the nine months ended March 31, 2014 compared to $6.6 million in the prior year comparable period. The $1.0 million reduction resulted from reductions in debt outstanding. Since March 2013, debt has been reduced by $24.0 million through Senior Note repurchases.

Income tax expense for the nine months ended March 31, 2014 totaled $14.1 million compared to $13.3 million for the nine months ended March 31, 2013. Our effective tax rate in the current year was 35.3% compared to 35.4% in the prior year. The current effective tax rate primarily includes tax expense on the current 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 period effective tax rate primarily includes the tax expense on the previous year's 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.

Net income for the nine months ended March 31, 2014, was $25.8 million compared to $24.3 million in the prior year comparable period. This resulted in net income per diluted share of $0.88 for the nine months ended March 31, 2014 compared to $0.83 per diluted share for the nine month period ended March 31, 2013.

Liquidity and Capital Resources

At March 31, 2014, we held unrestricted cash and cash equivalents of $95.8 million, marketable securities of $20.1 million, and restricted cash and investments of $8.9 million. At June 30, 2013, we held unrestricted cash and cash equivalents of $72.6 million, marketable securities of $15.5 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 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 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.

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.


ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

A summary of net cash provided by (used in) operating, investing, and financing activities for the nine months ended March 31, 2014 and 2013 is provided below (in millions):

                                                             Nine months ended
                                                                 March 31,
                                                              2014         2013
Operating Activities
Net income plus depreciation and amortization              $     39.1     $  37.8
Working capital items                                            (3.4 )       2.0
Other operating activities                                        4.3         4.6
Total provided by operating activities                     $     40.0     $  44.4

Investing Activities
Capital expenditures and acquisitions                      $    (12.6 )   $ (17.1 )
Net purchases of marketable securities                           (5.2 )      (9.6 )
Other investing activities                                        9.5         4.5
Total used in investing activities                         $     (8.3 )   $ (22.2 )

Financing Activities
Payments on long-term debt and capital lease obligations   $     (0.4 )   $  (0.2 )
Payment of cash dividends                                        (8.4 )     (19.6 )
Other financing activities                                        0.3         1.4
Total used in financing activities                         $     (8.4 )   $ (18.4 )

Operating Activities

In the first nine months of fiscal 2014, cash of $40.0 million was generated by operating activities, a decrease of $4.4 million from the prior year comparable period. This was largely due to cash used in fiscal year 2014 for increases in inventories, as compared to cash generated due to reductions in inventory in fiscal year 2013. This was partly offset by cash generated in fiscal 2014 due to increases in customer deposits compared to cash used during fiscal 2013 for decreases in customer deposits, as well as changes to other working capital items (defined below). There was $0.3 million less cash generated from other operating activities in fiscal 2014 than in fiscal 2013. Working capital items consist of current assets (accounts receivable, inventories, prepaid and other current assets) less current liabilities (customer deposits, payables, and accrued expenses and other current liabilities).

Investing Activities

In the first nine months of fiscal 2014, $8.3 million of cash was used in investing activities, which is $13.9 million less cash used than was used during the first nine months of fiscal 2013. Less cash was used in the first nine months of fiscal 2014 primarily due to the release of the restricted cash from the cash collateral account by the issuer of our private label credit card, sales of marketable securities and a decrease in capital expenditures, all in the current fiscal year. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

Financing Activities

In the first nine months of fiscal 2014, $8.4 million was used in financing activities, which is $9.9 million less cash used than was used during the first nine months of fiscal 2013. Three quarterly dividends were paid in the first nine months of fiscal 2014, and with a dividend increase from $0.09 to $0.10 per share paid in October 2013. In the first nine months of fiscal 2013, three quarterly dividends of $0.09 were paid, and the declaration and payment of a special dividend of $0.41 per share occurred in December 2012. 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, 2014, our outstanding debt totaled $131.0 million, which consists of $129.2 million in Senior Notes which mature in September 2015 (fiscal 2016) and $1.8 million in capital leases which mature at various times through February 2018. The aggregate scheduled maturities of long-term debt for each of the next five fiscal years are $0.5 million in fiscal 2015, $129.8 million in fiscal 2016, $0.5 million in fiscal 2017 and $0.2 million in fiscal 2018. At June 30, 2013, our outstanding debt totaled $131.3 million, the current and long-term portions of which amounted to less than $0.5 million and $130.8 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, 2013 as filed with the SEC on August 16, 2013.

We believe that our cash flow from operations, together with our other available sources of liquidity including refinancing alternatives, 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, 2014, we had working capital of $157.1 million compared to $127.6 million at June 30, 2013, an increase of $29.5 million, or 23.1%. The Company had a current ratio of 2.12 to 1 at March 31, 2014 and 1.96 to 1 at June 30, 2013.

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 directly or through agents, in the open market at prices and on terms satisfactory to us. All of our common stock repurchases and retirements are recorded as treasury stock and result in a reduction of shareholders' equity. During both nine month periods ending March 31, 2014 and 2013, there were no repurchases and/or retirements of our common stock. At March 31, 2014, we had a . . .

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