UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
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or
[] TRANSITION REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------------ ------------------------
Commission File Number: 1-11692
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ETHAN ALLEN INTERIORS INC.
-----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1275288
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer ID No.)
or organization)
ETHAN ALLEN DRIVE, DANBURY, CONNECTICUT 06811
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of September 30, 2003, there were 37,250,886 shares
of Common Stock, par value $.01 outstanding.
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
TABLE OF CONTENTS
Item Page
- ---- ----
PART I - FINANCIAL INFORMATION
1. Financial Statements as of September 30, 2003(unaudited) and
June 30, 2003 and for the three months ended September 30, 2003
and 2002 (unaudited)
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders' Equity 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
3. Quantitative and Qualitative Disclosures About Market Risk 23
4. Controls and Procedures 23
PART II - OTHER INFORMATION
1. Legal Proceedings 24
2. Changes in Securities and Use of Proceeds 24
3. Defaults Upon Senior Securities 24
4. Submission of Matters to a Vote of Security Holders 24
5. Other Information 24
6. Exhibits and Reports on Form 8-K 24
Signatures 25
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
2003 June 30,
(UNAUDITED) 2003
------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 129,485 $ 81,856
Accounts receivable, less allowance for doubtful
accounts of $1,469 at September 30, 2003 and $1,490
at June 30, 2003 28,138 26,439
Inventories, net (note 4) 190,302 198,212
Prepaid expenses and other current assets 29,866 30,779
Deferred income taxes 22,151 22,976
--------- ---------
Total current assets 399,942 360,262
Property, plant and equipment, net 282,981 289,423
Intangible assets, net (notes 6 and 7) 78,926 78,939
Other assets 2,508 2,944
--------- ---------
Total assets $ 764,357 $ 731,568
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 977 $ 996
Customer deposits 62,450 55,939
Accounts payable 32,680 25,375
Accrued compensation and benefits 29,129 29,308
Accrued expenses and other current liabilities (note 5) 24,806 22,808
--------- ---------
Total current liabilities 150,042 134,426
Long-term debt 9,180 9,222
Other long-term liabilities 2,311 2,682
Deferred income taxes 48,728 47,539
--------- ---------
Total liabilities 210,261 193,869
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000 shares authorized; 45,502,396
shares issued at September 30,
2003 and 45,449,086 shares issued at June 30, 2003 454 454
Class B common stock, par value $.01, 600,000 shares
authorized; no shares issued and outstanding at
September 30, 2003 and June 30, 2003 - -
Preferred stock, par value $.01, 1,055,000 shares
authorized; no shares issued and outstanding at
September 30, 2003 and June 30, 2003 - -
Additional paid-in capital 282,331 281,140
--------- ---------
282,785 281,594
Less: Treasury stock (at cost), 8,251,510 shares at
September 30, 2003 and June 30, 2003 (204,931) (204,931)
Retained earnings 475,656 460,456
Accumulated other comprehensive income (note 10) 586 580
--------- ---------
Total shareholders' equity 554,096 537,699
--------- ---------
Total liabilities and shareholders' equity $ 764,357 $ 731,568
========= =========
See accompanying notes to consolidated financial statements.
2
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
Three Months Ended
September 30,
2003 2002
-------- --------
Net sales $222,765 $216,529
Cost of sales 114,322 109,814
--------- --------
Gross profit 108,443 106,715
Operating expenses:
Selling 44,609 42,890
General and administrative 35,522 31,982
Restructuring and impairment charge (note 5) (264) (92)
-------- --------
Total operating expenses 79,867 74,780
-------- --------
Operating income 28,576 31,935
Interest and other miscellaneous income, net 2,211 524
Interest and other related financing costs 141 173
-------- --------
Income before income taxes 30,646 32,286
Income tax expense 11,707 12,204
-------- --------
Net income $ 18,939 $ 20,082
======== ========
PER SHARE DATA (NOTE 9):
Basic earnings per common share:
Net income per basic share $ 0.51 $ 0.53
======== ========
Basic weighted average common shares 37,227 37,986
Diluted earnings per common share:
Net income per diluted share $ 0.50 $ 0.52
======== ========
Diluted weighted average common shares 38,247 38,915
See accompanying notes to consolidated financial statements.
3
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
September 30,
2003 2002
-------- --------
Operating activities:
Net income $ 18,939 $ 20,082
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,265 5,033
Compensation expense (benefit) related to
restricted stock award 66 (430)
Provision (benefit) for deferred income taxes 2,014 1,912
Restructuring and impairment charge (264) (92)
Other non-cash (income) expense (1,104) (426)
Change in assets and liabilities, net of the
effects of acquired and divested businesses:
Accounts receivable (1,699) 3,354
Inventories 7,910 5,125
Prepaid and other current assets 3,681 (2,383)
Other assets 331 668
Customer deposits 6,511 6,746
Accounts payable 3,457 (5,251)
Income taxes payable 4,112 9,426
Accrued expenses and other current liabilities 1,137 (2,397)
Other long-term liabilities (371) (57)
--------- ---------
Net cash provided by operating activities 49,985 41,310
--------- ---------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 3,425 2,367
Capital expenditures (4,010) (9,309)
Acquisitions - (9,930)
Other 35 147
--------- ---------
Net cash used in investing activities (550) (16,725)
--------- ---------
Financing activities:
Other payments on long-term debt and capital
leases (53) (3,345)
Net proceeds from issuance of common stock 861 219
Dividends paid (2,614) (2,309)
Payments to acquire treasury stock - (29,578)
--------- ---------
Net cash used in financing activities (1,806) (35,013)
--------- ---------
Net increase (decrease) in cash and cash equivalents 47,629 (10,428)
Cash and cash equivalents - beginning of period 81,856 75,688
--------- ---------
Cash and cash equivalents - end of period $129,485 $ 65,260
========= =========
See accompanying notes to consolidated financial statements.
4
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 2003
(UNAUDITED)
(In thousands, except share data)
Accumulated
Additional Other
Common Paid-in Treasury Comprehensive Retained
Stock Capital Stock Income Earnings Total
------ ---------- -------- ------------- -------- -----
Balance at June 30, 2003 $454 $281,140 $(204,931) $580 $460,456 $537,699
Issuance of 53,310 shares of common
stock upon the exercise of stock
options and restricted stock award
compensation - 927 - - - 927
Tax benefit associated with exercise
of employee stock options - 264 - - - 264
Dividends declared on common stock - - - - (3,739) (3,739)
Other comprehensive income (note 10) - - - 6 - 6
Net income - - - - 18,939 18,939
--------
Total comprehensive income 18,945
---- -------- ---------- ---- -------- --------
Balance at September 30, 2003 $454 $282,331 $(204,931) $586 $475,656 $554,096
==== ======== ========== ==== ======== ========
See accompanying notes to consolidated financial statements.
5
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary
Ethan Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All of
Ethan Allen's capital stock is owned by the Company. The Company has no
other assets or operating results other than those associated with its
investment in Ethan Allen.
(2) INTERIM FINANCIAL PRESENTATION
All intercompany accounts and transactions have been eliminated in the
consolidated financial statements. In the opinion of the Company, all
adjustments, consisting only of normal recurring accruals necessary for
fair presentation, have been included in the financial statements. The
results of operations for the three months ended September 30, 2003 are
not necessarily indicative of results for the fiscal year. It is
suggested that the interim consolidated financial statements be read in
conjunction with the consolidated financial statements and accompanying
notes included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2003.
Certain reclassifications have been made to prior year financial
information in order to conform to the current year's presentation.
These changes were made for disclosure purposes only and did not have
an impact on previously reported results of operations or shareholders'
equity.
(3) EMPLOYEE STOCK PLANS
The Company's 1992 Stock Option Plan (the "Plan") is accounted for in
accordance with the recognition and measurement provisions of
Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations, which employs
the intrinsic value method of measuring compensation cost. Accordingly,
compensation expense is not recognized for fixed stock options if the
exercise price of the option equals the fair value of the underlying
stock at the grant date. For certain stock-based awards, where the
exercise price is equal to zero, the fair value of the award, measured
at the grant, is amortized to compensation expense on a straight-line
basis over the vesting period. In addition, other stock-based award
programs provided for under the Plan may also result in the recognition
of compensation expense (benefit) to the extent they are deemed to be
variable (as that term is defined in APB No. 25) in nature.
Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, encourages recognition of the
fair value of all stock-based awards on the date of grant as expense
over the vesting period. However, as permitted by SFAS No. 123, the
Company continues to apply the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25 and discloses certain
pro-forma amounts as if the fair value approach of SFAS No. 123 had
been applied.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this standard amends the disclosure
requirements of SFAS No. 123 by requiring more prominent pro-forma
disclosures in both the annual and interim financial statements, which
are included in the following table.
6
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table illustrates the effect on net income and earnings
per share if the fair value recognition provisions of SFAS No. 123 had
been applied to all outstanding and unvested awards in each period. The
Company employs the Black-Scholes option-pricing model in estimating
the fair value of stock options granted.
Three Months Ended
September 30,
2003 2002
------- -------
Net income as reported $18,939 $20,082
Add: Stock-based employee compensation
expense (benefit) included in reported
net income, net of related tax effects 41 (267)
Deduct: Stock-based employee compensation
expense determined under the fair value-
based method for all awards granted since
July 1, 1995, net of related tax effects (1,061) (191)
------- -------
Pro forma net income $17,919 $19,624
======= =======
Earnings per share:
Basic - as reported $ 0.51 $ 0.53
======= =======
Basic - pro forma $ 0.48 $ 0.52
======= =======
Diluted - as reported $ 0.50 $ 0.52
======= =======
Diluted - pro forma $ 0.47 $ 0.51
======= =======
(4) INVENTORIES
Inventories at September 30, 2003 and June 30, 2003 are summarized as
follows (in thousands):
September 30, June 30,
2003 2003
-------- --------
Finished goods $146,728 $147,704
Work in process 13,046 15,333
Raw materials 30,528 35,175
-------- --------
$190,302 $198,212
======== ========
Inventories are presented net of a related valuation allowance of $4.7
million at September 30, 2003 and June 30, 2003.
(5) RESTRUCTURING AND IMPAIRMENT CHARGES
In recent years, the Company has developed, announced and executed
plans to consolidate its manufacturing operations as part of an overall
strategy to maximize production efficiencies and maintain its
competitive advantage.
In the third quarter of fiscal 2003, the Company announced a plan to
close three of its smaller manufacturing facilities. Closure of these
facilities resulted in a headcount reduction totaling approximately 580
employees; 340 employees effective April 21, 2003, and 240 employees
throughout the last quarter of fiscal 2003 and the first quarter of
fiscal 2004. A pre-tax restructuring and impairment charge of $13.4
million was recorded for costs associated with these plant closings, of
which $4.5 million related to employee severance and benefits and other
plant exit costs, and $8.9 million related to fixed asset impairment
charges, primarily for real property and machinery and equipment
associated with the closed facilities. During
7
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the quarter ended September 30, 2003, adjustments totaling $0.2 million
were recorded to reverse certain of these previously established
accruals which are no longer required.
In the fourth quarter of fiscal 2002, the Company announced a plan that
involved the closure of one of its manufacturing facilities as well as
the rough mill operation of a separate facility. Closure of these
facilities resulted in a headcount reduction totaling approximately 220
employees; 150 employees effective June 29, 2002, and 70 employees
throughout the first quarter of fiscal 2003. A pre-tax restructuring
and impairment charge of $5.1 million was recorded for costs associated
with these plant closings, of which $2.0 million related to employee
severance and benefits and other plant exit costs, and $3.1 million
related to fixed asset impairment charges, primarily for real property
and machinery and equipment associated with the closed facilities.
During the quarter ended March 31, 2003, adjustments totaling $0.2
million were recorded to reverse certain of these previously
established accruals which are no longer required.
In the fourth quarter of fiscal 2001, the Company announced a plan that
involved the closure of three of its manufacturing facilities and a
headcount reduction totaling approximately 350 employees effective
August 6, 2001. A pre-tax restructuring and impairment charge of $6.9
million was recorded for costs associated with these plant closings, of
which $3.3 million related to employee severance and benefits and other
plant exit costs, and $3.6 million related to fixed asset impairment
charges, primarily for real property and machinery and equipment
associated with the closed facilities. During the quarter ended
September 30, 2002, adjustments totaling $0.1 million were recorded to
reverse certain of these previously established accruals which are no
longer required.
As of September 30, 2003, restructuring reserves totaling $0.3 million
were included in the Consolidated Balance Sheet as an accrued expense
within current liabilities. In addition, total impairment charges of
$15.6 million ($8.9 million, $3.1 million and $3.6 million in 2003,
2002 and 2001, respectively) were recorded to reduce certain property,
plant and equipment to net realizable value.
Activity in the Company's restructuring reserves is summarized as
follows (in thousands):
Fiscal 2003 Restructuring
-------------------------
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -----
Employee severance and other
related payroll and benefit
costs $ 4,339 $(3,876) $ (227)(a) $ 236
Plant exit costs and other 150 (150) - -
Write-down of long-lived assets 8,884 - (8,884) -
------- -------- -------- -----
Balance as of September 30, 2003 $13,373 $(4,026) $(9,111) $ 236
======= ======== ======== =====
Fiscal 2002 Restructuring
-------------------------
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -----
Employee severance and other
related payroll and benefit
costs $ 1,847 $(1,757) $ (90)(a) $ -
Plant exit costs and other 171 (38) (94)(a) 39
Write-down of long-lived assets 3,105 - (3,105) -
------- ------- -------- -----
Balance as of September 30, 2003 $ 5,123 $(1,795) $(3,289) $ 39
======= ======== ======== =====
8
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2001 Restructuring
-------------------------
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- -------- -----
Employee severance and other
related payroll and benefit
costs $ 2,974 $(2,916) $ (58)(a) $ -
Plant exit costs and other 332 (295) (37)(a) -
Write-down of long-lived assets 3,600 - (3,600) -
------- ------- -------- -----
Balance as of September 30, 2003 $ 6,906 $(3,211) $(3,695) $ -
======= ======== ======== =====
(a) Amounts represent the reversal of certain previously established accruals which
are no longer required.
(6) BUSINESS ACQUISITIONS
During the quarter ended September 30, 2002, the Company acquired
thirteen Ethan Allen retail stores from independent dealers for total
cash consideration of approximately $10.6 million. As a result of these
acquisitions, the Company (i) recorded additional inventory of $8.9
million and other assets of $5.6 million, and (ii) assumed customer
deposits of $3.8 million, third-party debt of $4.4 million and other
liabilities of $3.8 million. As of September 30, 2003, $3.4 million of
the third-party debt had been repaid by the Company. Goodwill
associated with these acquisitions totaled $8.1 million and represents
the premium paid to the sellers related to the acquired book of
business (i.e. market presence) and other fair value adjustments to the
assets acquired and liabilities assumed. Further discussion of the
Company's intangible assets can be found in Note 7. No acquisitions
occurred during the quarter ended September 30, 2003.
A summary of the Company's allocation of purchase price for the three
months ended September 30, 2003 and 2002 is provided below (in
thousands):
Three Months Ended
September 30,
2003 2002
---- ----
Nature of acquisition N/A 13 stores
Cash consideration $ - $ 10,550
Assets acquired and
liabilities assumed:
Inventory - 8,885
PP&E and other assets - 5,611
Customer deposits - (3,841)
Third-party debt - (4,433)
A/P and other liabilities - (3,755)
-------- ----------
Goodwill $ - $ 8,083
======== ==========
(7) GOODWILL AND OTHER INTANGIBLE ASSETS
On July 1, 2001, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As of September 30, 2003 and June 30, 2003, the
Company had goodwill, including product technology, (net of accumulated
amortization) of $59.2 million and other identifiable intangible assets
(net of accumulated amortization) of $19.7 million.
Goodwill in the wholesale and retail segments was $27.5 million and
$31.7 million, respectively, at September 30, 2003 and June 30, 2003.
9
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The wholesale segment, at both dates, includes additional intangible
assets of $19.7 million. These assets consist of Ethan Allen trade
names which were formerly being amortized over 40 years. In connection
with the adoption of Statement 142, the Company re-assessed the useful
lives of goodwill and other intangible assets and both were determined
to have indefinite useful lives. As such, amortization of these assets
ceased on July 1, 2001. No impairment losses were recorded on these
intangible assets as a result of the adoption of SFAS No. 142.
(8) LITIGATION
The Company has been named as a potentially responsible party ("PRP")
for the cleanup of three active sites currently listed or proposed for
inclusion on the National Priorities List under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA").
The Company believes it has resolved its liability at one of the sites
by completing remedial action activities. With regard to the other two
sites, the Company does not anticipate incurring significant cost as it
believes that it is not a major contributor based on the very small
volume of waste generated by the Company in relation to total volume at
the site. However, liability under CERCLA may be joint and several.
Additionally, the Company has been notified by the State of New York
that it may be a PRP in a separate, unrelated matter. However, the
extent of any adverse effect on the Company's financial condition,
results of operations, or cash flows with respect to this matter cannot
be reasonably estimated at this time.
(9) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
weighted average share data (in thousands):
Three Months Ended
September 30,
2003 2002
---- ----
Weighted average common shares
outstanding for basic calculation 37,227 37,986
Add: Dilutive effect of stock
options and warrants 1,020 929
------ ------
Weighted average common shares outstanding,
adjusted for diluted calculation 38,247 38,915
====== ======
As of September 30, 2003 and 2002, stock options to purchase 69,793
shares and 88,825 shares of common stock, respectively, had exercise
prices which exceeded the average market price for the corresponding
period. These options have been excluded from the respective diluted
earnings per share calculation as their impact is anti-dilutive.
(10) COMPREHENSIVE INCOME
Total comprehensive income represents the sum of net income and items
of "other comprehensive income or loss" that are reported directly in
equity. Such items may include foreign currency translation
adjustments, minimum pension liability adjustments, fair value
adjustments on certain derivative instruments, and unrealized gains and
losses on certain investments in debt and equity securities. The
Company has reported its total comprehensive income in the Consolidated
Statement of Shareholders' Equity.
10
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company's other comprehensive income, which is attributable solely
to foreign currency translation adjustments, was $0.6 million at both
September 30, 2003 and June 30, 2003. This amount, as well as the
Company's accumulated other comprehensive income included in equity,
are the result of changes in foreign currency exchange rates related to
the operations of 7 Ethan Allen-owned retail stores located in Canada.
Foreign currency translation adjustments exclude income tax expense
(benefit) given that the earnings of non-U.S. subsidiaries are deemed
to be reinvested for an indefinite period of time.
(11) SEGMENT INFORMATION
The Company's reportable segments are strategic business areas which
operate separately but which both offer the Company's complete line of
home furnishings through their own distinctive services. The Company's
operations are classified into two segments: wholesale and retail.
The wholesale segment is principally involved in the development of the
Ethan Allen brand, which encompasses the design, manufacture, domestic
and off-shore sourcing, sale and distribution of a full range of home
furnishing products to a network of independently-owned and Ethan
Allen-owned stores as well as related marketing and brand awareness
efforts. Wholesale profitability includes the wholesale gross margin,
which is earned on wholesale sales to all retail stores, including
Ethan Allen-owned stores.
The retail segment sells home furnishings through a network of Ethan
Allen-owned stores. Retail profitability includes the retail gross
margin, which represents the difference between retail sales price and
the cost of goods purchased from the wholesale segment.
While the manner in which the Company's home furnishings 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 manufacture and distribution
versus retail sales) are different. Within the wholesale segment, the
Company maintains revenue information according to each respective
product line (i.e. case goods, upholstery, or home accessories and
other).
A breakdown of wholesale sales by these product lines for the three
months ended September 30, 2003 and 2002 is provided below:
Three Months Ended
September 30,
2003 2002
---- ----
Case Goods 53% 54%
Upholstered Products 33 32
Home Accessories and Other 14 14
--- ---
100% 100%
=== ===
Similar information by product line is not available within the retail
segment as it is not practicable. However, because wholesale production
and sales are matched to incoming orders, the Company believes that the
allocation of retail sales would be similar to that of the wholesale
segment.
The Company evaluates performance of the respective segments based upon
revenues and operating income. Inter-segment eliminations result,
primarily, from the wholesale sale of inventory between segments,
including the related profit margin. Inter-segment eliminations also
include items not allocated to reportable segments.
11
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents segment information for the three months
ended September 30, 2003 and 2002 (in thousands):
Three Months Ended
September 30,
2003 2002
---- ----
NET SALES:
----------
Wholesale segment $158,919 $157,846
Retail segment 132,656 120,479
Elimination of inter-company sales (68,810) (61,796)
-------- --------
Consolidated Total $222,765 $216,529
======== ========
OPERATING INCOME:
-----------------
Wholesale segment $ 26,976 $ 28,969
Retail segment 205 3,047
Elimination (1) 1,395 (81)
-------- --------
Consolidated Total $ 28,576 $ 31,935
======== ========
CAPITAL EXPENDITURES:
---------------------
Wholesale segment $ 1,868 $ 3,963
Retail segment 2,142 5,346
Acquisitions (2) - 9,930
-------- --------
Consolidated Total $ 4,010 $ 19,239
======== ========
September 30, June 30,
2003 2003
-------- --------
TOTAL ASSETS:
-------------
Wholesale segment $496,290 $465,017
Retail segment 303,811 303,061
Inventory profit elimination (3) (35,744) (36,510)
-------- --------
Consolidated Total $764,357 $731,568
======== ========
(1) Adjustment represents the change in the elimination entry for
profit in ending inventory.
(2) There were no acquisitions completed during the three months ended
September 30, 2003. For the three months ended September 30, 2002,
acquisitions include the purchase of 13 retail stores.
(3) Inventory profit elimination reflects the embedded wholesale
profit in the Ethan Allen-owned store inventory that has not been
realized. These profits will be realized when inventory is shipped
to the retail customer.
At September 30, 2003, there were 28 Ethan Allen retail stores located
outside the United States, of which 21 were independently-owned.
Approximately 2% of the Company's net sales for the three month period
ended September 30, 2003 and 2002 were derived from sales to
non-domestic, independently-owned retail stores.
12
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions set forth in this form 10-Q should be read in conjunction with
the financial information included herein and the Company's Annual Report on
Form 10-K for the year ended June 30, 2003. 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 future results
of the Company. 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 various assumptions, risk and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
conditions in the various geographical markets where the Company does business,
technology developments affecting the Company's products and to those matters
discussed in the Company's filings with the Securities and Exchange Commission.
Accordingly, actual results could differ materially from those contemplated by
the forward-looking statements.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America which requires that certain estimates and assumptions be made that
affect the amounts and disclosures reported in the those financial statements
and the related accompanying notes. Actual results could differ from these
estimates and assumptions. Management uses its best judgment in valuing these
estimates and may, as warranted, solicit external advice. Estimates are based on
current facts and circumstances, prior experience and other assumptions believed
to be reasonable. The following critical accounting policies, some of which are
impacted significantly by judgments, assumptions and estimates, affect the
Company's consolidated financial statements.
Retail Store Acquisitions - The Company accounts for the acquisition of
retail stores and related assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations, which requires
application of the purchase method for all business combinations initiated after
June 30, 2001. Accounting for these transactions as purchase business
combinations requires the allocation of purchase price paid to the assets
acquired and liabilities assumed based on their fair values as of the date of
the acquisition. The amount paid in excess of the fair value of net assets
acquired is accounted for as goodwill.
Impairment of Long-Lived Assets and Goodwill - The Company periodically
evaluates whether events or circumstances have occurred that indicate that
long-lived assets may not be recoverable or that the remaining useful life may
warrant revision. When such events or circumstances are present, the Company
assesses the recoverability of long-lived assets by determining whether the
carrying value will be recovered through the expected undiscounted future cash
flows resulting from the use of the asset. In the event the sum of the expected
undiscounted future cash flows is less than the carrying value of the asset, an
impairment loss equal to the excess of the asset's carrying value over its fair
value is recorded. The long-term nature of these assets requires the estimation
of its cash inflows and outflows several years into the future and only takes
into consideration technological advances known at the time of the impairment
test.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company on July 1, 2001, goodwill and other intangible
assets are to be evaluated for impairment at the reporting unit level on an
annual basis and between annual tests whenever events or circumstances indicate
that the carrying value of a reporting unit may exceed its fair value. The
Company conducts its required annual impairment test during the fourth quarter
of each fiscal year. The impairment test uses a discounted cash flow model to
estimate the fair value of a reporting unit. This model requires the use of
long-term planning forecasts and assumptions regarding industry-specific
economic conditions that are outside the control of the Company.
13
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Allowance for Doubtful Accounts - The Company maintains an allowance
for doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. The allowance for doubtful accounts is
based on a review of specifically identified accounts in addition to an overall
aging analysis. Judgments are made with respect to the collectibility of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates.
Inventories - Inventories (finished goods, work in process and raw
materials) are stated at the lower of cost, determined on a first-in, first-out
basis, or market. Cost is determined based solely on those charges incurred in
the acquisition and production of the related inventory (i.e. material, labor
and manufacturing overhead costs). The Company estimates an inventory reserve
for excess quantities and obsolete items based on specific identification and
historical write-offs, taking into account future demand and market conditions.
If actual demand or market conditions in the future are less favorable than
those estimated, additional inventory write-downs may be required.
Revenue Recognition - Revenue is recognized when all of the following
have occurred: persuasive evidence of a sales arrangement exists (e.g. a
wholesale purchase order or retail sales invoice); the sales arrangement
specifies a fixed or determinable sales price; product is shipped or services
are provided to the customer; and collectability is reasonably assured. This
generally occurs upon the shipment of goods to independent dealers or, in the
case of Ethan Allen-owned retail stores, upon delivery to the customer. Recorded
sales provide for estimated returns and allowances. The Company permits retail
customers to return defective products and incorrect shipments for credit
against other purchases. Terms offered by the Company are standard for the
industry.
Business Insurance Reserves - The Company has insurance programs in
place to cover workers' compensation and property/casualty claims. The insurance
programs, which are funded through self-insured retention, are subject to
various stop-loss limitations. The Company accrues estimated losses using
actuarial models and assumptions based on historical loss experience. Although
management believes that the insurance reserves are adequate, the reserve
estimates are based on historical experience, which may not be indicative of
current and future losses. In addition, the actuarial calculations used to
estimate insurance reserves are based on numerous assumptions, some of which are
subjective. The Company adjusts insurance reserves, as needed, in the event that
future loss experience differs from historical loss patterns.
Other Loss Reserves - The Company has a number of other potential loss
exposures incurred in the ordinary course of business such as environmental
claims, product liability, litigation, restructuring charges, and the
recoverability of deferred income tax benefits. Establishing loss reserves for
these matters requires management's estimate and judgment with regard to maximum
risk exposure and ultimate liability or realization. As a result, these
estimates are often developed with the Company's counsel, or other appropriate
advisors, and are based on management's current understanding of the underlying
facts and circumstances. Because of uncertainties related to the ultimate
outcome of these issues or the possibilities of changes in the underlying facts
and circumstances, additional charges related to these issues could be required
in the future.
RESULTS OF OPERATIONS
Ethan Allen's revenues are comprised of (i) wholesale sales to
independently-owned and Company-owned retail stores and (ii) retail sales of
Company-owned stores. See Note 11 to the Company's Consolidated Financial
Statements for the three months ended September 30, 2003 and 2002. The
components of consolidated revenues and operating income were as follows (in
millions):
Three Months Ended
September 30,
2003 2002
---- ----
REVENUE:
--------
Wholesale segment $158.9 $157.8
Retail segment 132.7 120.5
Elimination of inter-segment sales (68.8) (61.8)
------ ------
Consolidated Revenue $222.8 $216.5
====== ======
14
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Three Months Ended
September 30,
2003 2002
---- ----
OPERATING INCOME:
-----------------
Wholesale segment $ 27.0 $ 29.0
Retail segment 0.2 3.0
Elimination 1.4 (0.1)
------ ------
Consolidated Operating Income $ 28.6 $ 31.9
====== ======
QUARTER ENDED SEPTEMBER 30, 2003 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2002
Consolidated revenue for the three months ended September 30, 2003
increased by $6.3 million, or 2.9%, to $222.8 million from $216.5 million for
the three months ended September 30, 2002. Net sales have increased due to the
continued expansion and strategic re-positioning of the Company's retail segment
coupled with an increase in the Company's incoming order rate stemming from a
modest improvement in consumer confidence and a strengthening of the U.S.
economy during the past three months.
Total wholesale revenue for the first quarter of fiscal 2004 increased
by $1.1 million, or 0.7%, to $158.9 million from $157.8 million in the first
quarter of fiscal 2003. As stated previously, the incoming order rate was
positively impacted by improved consumer spending habits, particularly during
the last month of the quarter, and a strengthening of the U.S. economy during
the period. To a lesser extent, wholesale sales volume was also positively
impacted by one additional production day in the current year quarter as
compared to the prior year.
Total retail revenue from Ethan Allen-owned stores for the three months
ended September 30, 2003 increased by $12.2 million, or 10.1%, to $132.7 million
from $120.5 million for the three months ended September 30, 2002. The increase
in retail sales by Ethan Allen-owned stores was attributable to an increase in
sales generated by newly opened or acquired stores of $16.6 million, and an
increase in comparable store delivered sales of $0.7 million, or 0.6%, partially
offset by a decrease resulting from closed stores, which generated $5.1 million
fewer sales in the first quarter of fiscal 2004 as compared to fiscal 2003. The
number of Ethan Allen-owned stores increased to 120 as of September 30, 2003 as
compared to 116 as of September 30, 2002. During that twelve month period, the
Company acquired 3 stores from independent dealers, relocated 2 stores, closed 3
stores and opened 4 new stores, including the first dedicated Ethan Allen Kids
retail store location.
Comparable stores 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 stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Total booked orders, which include wholesale orders and written
business of Ethan Allen-owned retail stores, increased 11.3% from the prior year
quarter, reflecting the continued expansion of the Company's retail segment,
modest improvement in consumer confidence, and a strengthening of the U.S.
economy. Quarter-over-quarter, wholesale orders increased 12.4% while Ethan
Allen-owned store written business increased 8.3% and comparable store written
business decreased 1.3%.
Gross profit increased during the quarter to $108.4 million from $106.7
million in the prior year first quarter. The $1.7 million, or 1.6%, increase in
gross profit was primarily attributable to a higher proportionate share of
retail sales to total sales (60% in the current quarter compared to 56% in the
prior year quarter), and, to a lesser extent, higher margins attributable to the
off-shore sourcing of selected product lines. These favorable variances were
partially offset by (i) increased costs associated with excess capacity at our
manufacturing facilities, particularly during the third and fourth quarters of
fiscal 2003, (ii) lower retail margins as a result of the sell-off of floor
inventory necessary to make room for new product introductions,
15
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
including Ethan Allen Kids and New Country, and (iii) lower-than-anticipated
shipments due to general business softness experienced for much of the period.
Consolidated gross margin decreased to 48.7% in the first quarter of fiscal 2004
from 49.3% in the prior year quarter as a result of the factors identified
previously.
Operating expenses increased $5.1 million, or 6.8%, to $79.9 million,
or 35.9% of net sales, in the current year quarter from $74.8 million, or 34.5%
of net sales, in the prior year quarter. This increase is primarily attributable
to further expansion of the retail segment and the higher proportionate share of
retail sales to total sales in the current quarter as compared to the prior year
quarter. The addition of 4 net new Ethan Allen-owned stores since September 2002
has resulted in higher costs associated with warehousing and delivery,
occupancy, advertising, healthcare and design consultant salaries. These
increases were partially offset by a decrease in selling expense within the
wholesale division as the result of a continued Company-wide focus on cost
containment.
Operating income for the three months ended September 30, 2003 was
$28.6 million, or 12.8% of net sales, compared to $31.9 million, or 14.7% of net
sales, for the three months ended September 30, 2002. This represents a decrease
of $3.3 million, or 10.5%, which is primarily attributable to increased
operating expenses resulting from the continued expansion of the retail segment,
partially offset by lower selling costs within the wholesale division and a
modest increase in gross profit.
Total wholesale operating income for the first quarter of fiscal 2003
was $27.0 million, or 17.0% of net sales, compared to $29.0 million, or 18.4% of
net sales, in the first quarter of fiscal 2002. The decrease of $2.0 million, or
6.9%, is primarily attributable to increased costs associated with excess
capacity at our manufacturing facilities, particularly during the third and
fourth quarters of fiscal 2003, partially offset by decreased operating expenses
within the division.
Operating income for the retail segment decreased $2.8 million to $0.2
million, or 0.2% of net sales, for the first quarter of fiscal 2004, as compared
to $3.0 million, or 2.5% of net sales, in the prior year period. The decrease in
retail operating income generated by Ethan Allen-owned stores is primarily
attributable to (i) higher operating expenses related to the addition of 4 net
new stores since September 2002, (ii) a lower gross margin resulting from the
sell-off of floor inventory necessary to make room for the aforementioned new
product offerings, and (iii) lower-than-anticipated shipments due to general
business softness experienced for much of the period, and, to a lesser extent,
the effects of Hurricane Isabel throughout the mid-Atlantic states. These
unfavorable variances were partially offset by increased sales volume associated
with new stores and a modest increase in comparable store sales.
Interest and other miscellaneous income for the current quarter totaled
$2.2 million, representing an increase of $1.7 million from $0.5 million
recorded in the prior year quarter. The increase is due, primarily, to (i) a
favorable judgment in the case of an outstanding legal matter, (ii) larger gains
recorded in the current period in connection with the sale of real estate, and
(iii) a decrease in the Company's share of first quarter losses incurred in
connection with its United Kingdom joint venture with MFI Furniture Group Plc.
Income tax expense for the three months ended September 30, 2003 was
$11.7 million as compared to $12.2 million for the three months ended September
30, 2002. The Company's effective tax rate for the current quarter was 38.2%, up
slightly from 37.8% in the prior year quarter. The higher effective tax rate is
the result of increased income tax liability arising in connection with the
operation of a greater number of Company-owned stores, some of which are located
in new jurisdictions, and recently-enacted changes within certain state tax
legislation.
For the three months ended September 30, 2003, the Company recorded net
income of $18.9 million, a decrease of $1.2 million, as compared to $20.1
million recorded in the first quarter of fiscal 2003. Earnings per diluted share
for the current quarter amounted to $0.50, representing a decrease of $0.02 per
diluted share, or 4.1%, from $0.52 per diluted share in the prior year quarter.
16
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
QUARTER ENDED SEPTEMBER 30, 2002 COMPARED TO QUARTER ENDED SEPTEMBER 30, 2001
Consolidated revenue for the three months ended September 30, 2002
increased by $9.8 million, or 4.7%, to $216.5 million from $206.7 million for
the three months ended September 30, 2001. Net sales have increased due to the
continued expansion of the Company's retail segment offset slightly by delays
experienced related to certain off-shore sourced product lines and a relative
softness in consumer spending caused by a sluggish economy. Subsequent to the
end of the quarter, the Company announced that it would be selectively reducing
prices by up to 20% on certain items within four collections: British Classics;
Country French; Horizons by Ethan Allen; and Country Crossings. The objectives
of the price reductions were to increase sales volume within some of the more
popular collections while continuing to expand the Company's consumer reach.
Such price reductions did not have a material adverse effect on the Company's
consolidated operations.
Total wholesale revenue for the first quarter of fiscal 2003 increased
by $2.9 million, or 1.9%, to $157.8 million from $154.9 million in the first
quarter of fiscal 2002. The wholesale segment continues to be challenged by the
state of the U.S. economy and was further adversely affected during the quarter
by the inability to service backlog associated with certain imported product
lines as a result of higher-than-anticipated sales volume and the closure of
selected West Coast ports.
Total retail revenue from Ethan Allen-owned stores for the three months
ended September 30, 2002 increased by $21.7 million, or 21.9%, to $120.5 million
from $98.8 million for the three months ended September 30, 2001. The increase
in retail sales by Ethan Allen-owned stores was attributable to an increase in
sales generated by newly opened or acquired stores of $28.5 million, partially
offset by a decrease in comparable store delivered sales of $3.3 million, or
3.6%, and a decrease resulting from sold and closed stores, which generated $3.5
million fewer sales in fiscal 2003 as compared to fiscal 2002. The number of
Ethan Allen-owned stores increased to 116 as of September 30, 2002 as compared
to 93 as of September 30, 2001. During that twelve month period, the Company
acquired 23 stores from independent dealers, sold 1 to an independent dealer,
relocated 2 stores, and opened 1 new store. Of the 10 stores acquired during the
quarter ended September 30, 2001, 6 stores were purchased from Mr. Edward D.
Teplitz, who subsequently joined the Company as Vice President of Finance (see
Part II, Item 5 of the Form 10-Q filed on November 15, 2001). In August 2002,
Mr. Teplitz was named Chief Financial Officer of the Company.
Total booked orders, which include wholesale orders and written
business of Ethan Allen-owned retail stores, increased from the prior year
quarter by 9.9%, reflecting the continued expansion of the Company's retail
segment and the success of recent off-shore sourced product introductions,
partially offset by the effects of a relative softness in consumer spending.
Quarter-over-quarter, wholesale orders increased 3.6% while Ethan Allen-owned
store written business increased 32.7% and comparable store written business
increased 4.8%.
Gross profit increased during the quarter to $106.7 million from $94.0
million in the first quarter of the prior year. The $12.7 million, or 13.6%,
increase in gross profit was primarily attributable to (i) a higher
proportionate share of retail sales to total sales (56% in the current quarter
compared to 48% in the prior year quarter), (ii) lower manufacturing costs
resulting from efficiencies gained as a result of plant closures implemented in
fiscal 2001 and fiscal 2002, and (iii) the Company's continued focus on quality
and cost savings within all facets of its operations. Consolidated gross margin
increased to 49.3% in the first quarter of fiscal 2003 from 45.5% in the prior
year first quarter. The gross margin was positively impacted as a result of the
factors identified previously.
During the quarter, it was determined that certain stock unit awards
previously expensed by the Company would not be issued to Mr. Farooq Kathwari,
Chairman and Chief Executive Officer. The granting and vesting of such stock
unit awards was governed by the provisions of Mr. Kathwari's 1997 Employment
Agreement (the "1997 Agreement") which
17
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
provided for an initial five-year term of employment through June 30, 2002 and
the option of two additional one-year extensions. The Company and Mr. Kathwari
entered into a new employment agreement effective July 1, 2002 (the "New
Agreement"). Despite Mr. Kathwari's continued employment subsequent to June 30,
2002, the Company determined that certain stock unit awards contemplated under
the performance provisions of the 1997 Agreement would not be granted as a
result of Mr. Kathwari's performance being governed, effective July 1, 2002, by
the terms of the New Agreement. As such, the related stock units were canceled
and $0.5 million ($0.3 million, after-tax) of previously recognized compensation
expense was reversed.
Operating expenses increased $7.4 million, or 11.0%, to $74.8 million,
or 34.5% of net sales, in the current year quarter from $67.4 million, or 32.6%
of net sales, in the prior year quarter. This increase is primarily attributable
to further expansion of the retail segment and the higher proportionate share of
retail sales to total sales in the current quarter as compared to the prior year
quarter. The addition of 23 net new Ethan Allen-owned stores since September
2001 has resulted in higher costs associated with warehousing and delivery,
occupancy, advertising, healthcare and design consultant salaries. These
increases were partially offset by a decrease in distribution costs resulting
from a decline in the volume of wholesale shipments.
Operating income for the three months ended September 30, 2002 was
$31.9 million, or 14.7% of net sales, compared to $26.5 million, or 12.8% of net
sales, for the three months ended September 30, 2001. This represents an
increase of $5.4 million, or 20.0%, which is primarily attributable to a higher
gross margin and lower wholesale distribution costs, partially offset by
increased operating expenses resulting from the continued expansion of the
retail segment.
Total wholesale operating income for the first quarter of fiscal 2003
was $29.0 million, or 18.4% of net sales, compared to $23.3 million, or 15.0% of
net sales, in the first quarter of fiscal 2002. The increase of $5.7 million, or
24.1%, is primarily attributable to (i) lower manufacturing costs resulting from
efficiencies gained as a result of plant closures implemented in fiscal 2001 and
fiscal 2002, (ii) lower distribution costs, and (iii) the Company's continued
focus on quality and cost savings, partially offset by lower wholesale sales
volume.
Operating income for the retail segment during the current quarter
remained unchanged from the prior year quarter at $3.0 million. Operating income
as a percentage of net sales, however, decreased to 2.5% for the three months
ended September 30, 2002 from 3.0% for the three months ended September 30,
2001. The level of retail operating income generated by Ethan Allen-owned stores
is primarily attributable to a 3.6% decline in comparable store sales and higher
operating expenses related to the addition of 23 net new stores since September
2001, partially offset by increased sales volume associated with new stores.
Interest and other miscellaneous income for the current quarter was
$0.5 million, an increase of $0.1 million from the prior year quarter. The
increase is due, primarily, to additional income recognized in connection with
the sale of real estate, partially offset by a decrease in interest income
associated with the Company's investment portfolio as a result of a decline in
interest rates during that same period.
Income tax expense was $12.2 million for the quarter ended September
30, 2002 as compared to $10.2 million for the comparable quarter in the prior
year. The Company's effective tax rate was 37.8% in both periods.
For the three months ended September 30, 2002, the Company recorded net
income of $20.1 million, an increase of $3.4 million, from $16.7 million
recorded for the three months ended September 30, 2001. Earnings per diluted
share were $0.52 for the current quarter representing an increase of $0.10, or
23.8%, from $0.42 per diluted share in the prior year quarter.
18
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are cash flow from
operations and borrowing capacity under a revolving credit facility. Net cash
provided by operating activities totaled $50.0 million for the three months
ended September 30, 2003, compared to $41.3 million for the three months ended
September 30, 2002. The quarter-over-quarter increase of $8.7 million was
principally the result of (i) an $8.7 million decrease in cash required to
satisfy outstanding accounts payable, (ii) a $6.1 million decrease in prepaid
expenses and other current assets, (iii) a $3.4 million increase in accrued
expenses, and (iv) inventory levels which decreased $7.9 million during the
current period, representing a $2.8 million variance from the decrease in
inventory noted in the prior year period. These favorable variances were
partially offset by (i) a $5.3 million decrease in income taxes payable, (ii) a
$5.1 million decrease in cash collected related to outstanding accounts
receivable, and (iii) a $1.2 million decrease in net income.
The decrease in inventory levels since June 2003 was the result,
primarily, of (i) an increase in through-put within the wholesale division,
serving to reduce the overall level of raw materials and work-in-process, (ii)
reduced inventory requirements stemming from the closure of three manufacturing
facilities as was previously announced in March 2003, and (iii) a decline in
finished goods inventories.
Net cash used in investing activities totaled $0.6 million in the
current period as compared to $16.7 million recorded in the prior year period.
The decrease was due to a decline in the level of capital spending, exclusive of
acquisitions, to $4.0 million for the three months ended September 30, 2003 from
$9.3 million for the three months ended September 30, 2002. Further, $9.9
million was utilized in the prior year quarter to finance the acquisition of
thirteen retail stores; no acquisitions occurred during the current year. The
current level of capital spending is principally attributable to (i) new store
development and renovation and (ii) technology improvements. The Company
anticipates that cash from operations will be sufficient to fund future capital
expenditures.
Net cash used in financing activities totaled $1.8 million in the
current period as compared to $35.0 million in the prior year period, a decrease
of $33.2 million. The decrease in net cash used in financing activities is the
result, primarily, of (i) a decrease in payments related to the acquisition of
treasury stock ($29.6 million), and (ii) a decrease in cash utilized in the
repayment of debt ($3.3 million). Total debt outstanding at September 30, 2003
was $10.2 million. At September 30, 2003, there were no revolving loans
outstanding under the Company's credit facility. Trade and standby letters of
credit outstanding under the facility at September 30, 2003 totaled $20.0
million and the Company's remaining available borrowing capacity was $105.0
million at that date.
The Company has been authorized by its Board of Directors to repurchase
its common stock from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The Company also
retires shares of unvested restricted stock and, prior to June 30, 2002,
repurchased shares of common stock from terminated or retiring employee's
accounts in the Ethan Allen Retirement Savings Plan. All of the Company's common
stock repurchases and retirements are recorded as treasury stock and result in a
reduction of shareholders' equity.
During the first three months of fiscal years 2004 and 2003, the
Company repurchased the following shares of its common stock:
Three Months Ended
September 30,
2003 2002(1)
---- ----
Common shares repurchased - 721,300
Cost to repurchase common shares - $22,381,598
Average price per share - $31.03
(1) The cost to repurchase shares for the three months ended September
30, 2002 reflects $7,197,165 in common stock repurchases with a
June 2002 trade date and a July 2002 settlement date.
19
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
The Company funded its common stock repurchases through available cash
and cash from operations. As of September 30, 2003, the Company had a remaining
Board authorization to purchase 1.3 million shares.
As of September 30, 2003, the aggregate scheduled maturities of the
Company's long-term debt for each of the next five fiscal years are as follows:
$4.7 million in fiscal 2005, $0.2 million in fiscal 2006, $0.1 million in fiscal
2007, $0.1 million in fiscal 2008, $0.1 million in fiscal 2009 and $4.0 million
thereafter. Management believes that its cash flow from operations, together
with its other available sources of liquidity, will be adequate to make all
required payments of principal and interest on its debt, to permit anticipated
capital expenditures and to fund working capital and other cash requirements
over the next twelve months. As of September 30, 2003, the Company had working
capital of $249.9 million and a current ratio of 2.67 to 1.
OFF-BALANCE SHEET ARRANGEMENTS AND OTHER COMMITMENTS, CONTINGENCIES AND
CONTRACTUAL OBLIGATIONS
Except as indicated below, the Company does not utilize or employ any
off-balance sheet arrangements in operating its business. As such, the Company
does not maintain any (i) retained or contingent interests, (ii) derivative
instruments, or (iii) variable interests which could serve as a source of
potential risk to its future liquidity, capital resources and results of
operations.
The Company, or its wholly-owned subsidiaries, may, from time to time
in the ordinary course of business, provide guarantees on behalf of selected
affiliated entities or become contractually obligated to perform in accordance
with the terms and conditions of certain business agreements. The nature and
extent of these guarantees and obligations varies based on the underlying
relationship of the benefiting party to the Company and the business purpose for
which the guarantee or obligation is being provided. Details of those
arrangements for which the Company, or any of its wholly-owned subsidiaries, act
as guarantor or obligor are provided below.
Dealer-Related Guarantees
As part of the Company's expansion strategy for the Ethan Allen retail
store network, selected independent dealers are provided, on rare occasion, with
financial guarantees relating to leases in connection with certain store
locations. As of September 30, 2003, one such guarantee exists. This guarantee,
which has been provided by Ethan Allen Inc. on behalf of an independent dealer,
has a remaining term of twelve months, which generally represents the remaining
contractual terms of the underlying lease agreement (subject to certain term
limitations). The Company is obligated to act under such guarantee in the event
of default by the respective dealer (lessee). The maximum potential amount of
future payments (undiscounted) that the Company could be required to make under
this guarantee is limited to the amount of the remaining contractual lease
payments (subject to certain term limitations) and, as such, is not an estimate
of future cash flows. As of September 30, 2003, the amount of remaining
contractual lease payments guaranteed by the Company was approximately $0.3
million. The Company maintains specific recourse rights related to this dealer
arrangement that would enable recovery of any amount paid under this guarantee.
Management expects, based on the underlying creditworthiness of the guaranteed
party, this guarantee will expire without requiring funding by the Company.
Accordingly, as of September 30, 2003, the carrying amount of the liability
related to such guarantee is zero.
In addition, Ethan Allen Inc. has obligated itself, on behalf of one of
its independent dealers, with respect to a $1.5 million credit facility (the
"Credit Facility") comprised of a $1.1 million revolving line of credit and a
$0.4 million term loan. This obligation requires the Company, in the event of
the dealer's default under the Credit Facility, to repurchase the dealer's
inventory, applying such purchase price to the dealer's outstanding indebtedness
under the Credit Facility. The Company's obligation remains in effect for the
life of the term loan which expires in April 2008. The maximum potential amount
of future payments (undiscounted) that the Company could be required to make
under this obligation is limited to the amount outstanding under the Credit
Facility
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
at the time of default (subject to pre-determined lending limits based
on the value of the underlying inventory) and, as such, is not an estimate of
future cash flows. No specific recourse or collateral provisions exist that
would enable recovery of any portion of amounts paid under this obligation,
except to the extent that the Company maintains the right to take title to the
repurchased inventory. Management anticipates that the repurchased inventory
could subsequently be sold through the Company's retail store network. As of
September 30, 2003, the total amount outstanding under the Credit Facility
totaled approximately $1.0 million, of which $0.7 million was outstanding under
the revolving credit line. Management expects, based on the underlying
creditworthiness of the respective dealer, this obligation will expire without
requiring funding by the Company. However, in accordance with the provisions of
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, a
liability has been established to reflect the Company's non-contingent
obligation under this arrangement as a result of modifications made to the
Credit Facility subsequent to January 1, 2003. As of September 30, 2003, the
carrying amount of such liability is less than $50,000.
Indemnification Agreement
In connection with the Company's joint venture arrangement with United
Kingdom-based MFI Furniture Group Plc., Ethan Allen Inc. has entered into a tax
cross-indemnification agreement with the joint venture partner. The
indemnification agreement stipulates that both parties agree to pay fifty
percent of the amount of any tax liability arising as a result of (i) an adverse
tax judgment or (ii) the imposition of additional taxes against either partner,
and attributable to the operations of the joint venture. The indemnification
agreement is effective until such time that the joint venture is terminated. At
the present time, management anticipates that the joint venture will continue to
operate for the foreseeable future.
The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under this indemnification agreement is
indeterminable as no such tax liability currently exists. Further, the nature,
extent and magnitude of any such tax liability arising in the future as a result
of an adverse tax judgment or change in applicable tax law cannot be estimated
with any reasonable certainty. It should be further noted that no recourse or
collateral provisions exist that would enable recovery of any portion of amounts
paid under this indemnification agreement. Management expects, based on its
current understanding of the applicable tax laws and the existing legal
structure of the joint venture, subject to future changes in applicable laws and
regulations, this cross-indemnity agreement will expire without requiring
funding by the Company. Accordingly, as of September 30, 2003, the carrying
amount of the liability related to this indemnification agreement is zero.
Residual Value Guarantees
In connection with its distribution activities, the Company has entered
into operating lease agreements for certain trucks and trailers within its
fleet. For a portion of these vehicles, the Company has guaranteed the related
residual values upon completion of the contractual lease terms. The remaining
terms of such guarantees range from one to two years, and generally represent
the remaining contractual terms of the underlying lease agreements. The Company
is obligated to act under such guarantees in the event that the fair value of
the vehicles at the end of the lease term is less than the guaranteed residual
value. The maximum potential amount of future payments (undiscounted) that the
Company could be required to make under these guarantees is limited to the
guaranteed residual value for each respective vehicle subject to such guarantee
and, as such, is not an estimate of future cash flows. As of September 30, 2003,
the Company's maximum potential exposure related to residual value guarantees
was approximately $0.5 million. While no specific recourse or collateral
provisions exist that would enable recovery of any portion of amounts paid under
these guarantees, all payments made by the Company related to such guarantees
are computed net of the proceeds received by the lessor upon sale of the
underlying assets. Management, based on historical experience and the present
condition of its fleet, expects these guarantees will expire without requiring
funding by
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
the Company. Accordingly, as of September 30, 2003, the carrying amount of the
liability related to such guarantees is zero.
Product Warranties
The Company's products, including its case goods, upholstery and home
accents, generally carry explicit product warranties that extend from three to
five years and are provided based on terms that are generally accepted in the
industry. All of the Company's independent dealers are required to enter into,
and perform in accordance with the terms and conditions of, a warranty service
agreement. The Company records provisions for estimated warranty and other
related costs at time of sale based on historical warranty loss experience and
makes periodic adjustments to those provisions to reflect actual experience. On
rare occasion, certain warranty and other related claims involve matters of
dispute that ultimately are resolved by negotiation, arbitration or litigation.
In certain cases, a material warranty issue may arise which is beyond the scope
of the Company's historical experience. The Company provides for such warranty
issues as they become known and estimable. It is reasonably possible that, from
time to time, additional warranty and other related claims could arise from
disputes or other matters beyond the scope of the Company's historical
experience. As of September 30, 2003, the Company's product warranty liability
totaled $0.8 million.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
As of September 30, 2003, the Company was essentially debt-free. Cash
and short-term investments totaled $129.5 million and there were no revolving
loans outstanding under the Company's credit facility. The current portion of
the Company's outstanding long-term debt and capital lease obligations totaled
$1.0 million as of September 30, 2003, while the long-term portion totaled $9.2
million.
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short-term debt, if required, is used to meet working capital requirements and
long-term debt is generally used to finance long-term investments. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements.
The Company has one debt instrument outstanding with a variable
interest rate. This debt instrument has a principal balance of $4.6 million and
matures in 2004. Based on the principal balance outstanding, a one-percentage
point increase in the variable interest rate would not have had a significant
impact on the Company's interest expense.
Currently, the Company does not enter into financial instrument
transactions for trading or other speculative purposes or to manage interest
rate exposure.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
Ethan Allen's management, including the Chairman of the Board and Chief
Executive Officer ("CEO") and the Vice President-Finance ("VPF"), conducted an
evaluation of the effectiveness of disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) as of the end of the period
covered by this report. Based on such evaluation, the CEO and VPF have concluded
that, as of September 30, 2003, the Company's disclosure controls and procedures
are effective in ensuring that material information relating to the Company
(including its consolidated subsidiaries), which is required to be included in
the Company's periodic filings under the Exchange Act, has been made known to
them in a timely manner.
There have been no significant changes in the Company's internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the Company's most recent fiscal
quarter (the Company's fourth fiscal quarter in the case of an annual report)
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There has been no change to matters discussed in Part I, Item 3 - Legal
Proceedings in the Company's Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on September 22, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
---- --------
* 31.1 Rule 13a-14(a) Certification of Principal Executive
Officer
* 31.2 Rule 13a-14(a) Certification of Principal Financial
Officer
* 32.1 Section 1350 Certifications of Principal Executive
Officerand Principal Financial Officer
* Filed herewith.
(b) Reports on Form 8-K
During the three month period ended September 30, 2003, the
Company filed a Current Report on Form 8-K dated July 31,
2003, covering information reported under Item 9. Regulation
------------------
FD Disclosure but furnished pursuant to Item 12. Results of
------------- --------------------
Operations and Financial Condition in accordance with SEC
-------------------------------------
Release Nos. 33-8216 and 33-8176.
The Company also filed a Current Report on Form 8-K dated
October 15, 2003, covering information reported under Item 12.
--------
Results of Operations and Financial Condition in accordance
------------------------------------------------
with SEC Release No. 33-8176.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ETHAN ALLEN INTERIORS INC.
(Registrant)
DATE: November 7, 2003 BY: /S/ M. FAROOQ KATHWARI
-----------------------------------
M. Farooq Kathwari
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
DATE: November 7, 2003 BY: /S/ JEFFREY HOYT
------------------------------------
Jeffrey Hoyt
Vice President, Finance
(Principal Financial Officer)
25