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Ethan Allen Interiors 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-10
  3. Ex-10
  4. Ex-31
  5. Ex-31
  6. Ex-32
  7. Ex-32
  8. Ex-32

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from ________________________ to ________________________

Commission File Number:  1-11692


Ethan Allen Interiors Inc.
(Exact name of registrant as specified in its charter)

Delaware
  06-1275288
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

Ethan Allen Drive, Danbury, Connecticut
  06811
(Address of principal executive offices)   (Zip Code)

(203) 743-8000
(Registrants telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [    ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [X] Accelerated filer [    ] Non-accelerated filer [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[    ] Yes [X] No

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

At September 30, 2007, there were 29,767,645 shares of  Class A Common Stock,
par value $.01, outstanding

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

Item

Page

Part I Financial Information

 

1.

Financial Statements as of September 30, 2007 (unaudited) and June 30, 2007

and for the three months ended September 30, 2007 and 2006 (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

21

3.

Quantitative and Qualitative Disclosures About Market Risk

31

4.

Controls and Procedures

31

 

 

 

 

Part II Other Information

 

1.

Legal Proceedings

32

1A.

Risk Factors

32

2.

Unregistered Sales of Equity Securities and Use of Proceeds

32

3.

Defaults Upon Senior Securities

32

4.

Submission of Matters to a Vote of Security Holders

32

5.

Other Information

32

6.

Exhibits

32

 

 

 

 

Signatures

33

PART I FINANCIAL INFORMATION

Item 1.  Financial Statements

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

September 30, 2007 June 30, 2007
  (unaudited)  
ASSETS            
Current assets:    
    Cash and cash equivalents     $ 133,484   $ 147,879  
    Accounts receivable, less allowance for doubtful accounts
       of $2,093 at September 30, 2007 and $2,042 at June 30, 2007
      14,255     14,602  
    Inventories (note 4)       181,297     181,884  
    Prepaid expenses and other current assets       29,572     33,104  
    Deferred income taxes       4,464     4,960  
           Total current assets       363,072     382,429  
 
Property, plant and equipment, net       326,460     322,185  
Goodwill and other intangible assets (notes 6 and 7)       92,656     92,500  
Other assets (note 8)       5,246     5,484  
       Total assets     $ 787,434   $ 802,598  
LIABILITIES AND SHAREHOLDERS EQUITY    
Current liabilities:    
    Current maturities of long-term debt (note 8)     $ 40   $ 40  
    Customer deposits       56,216     52,072  
    Accounts payable       25,184     26,650  
    Accrued compensation and benefits       36,656     35,243  
    Accrued expenses and other current liabilities (note 5)       31,469     33,434  
           Total current liabilities       149,565     147,439  
 
Long-term debt (note 8)       202,899     202,868  
Other long-term liabilities (note 3)       21,144     12,003  
Deferred income taxes       30,199     30,646  
       Total liabilities       403,807     392,956  

Shareholders equity:
   

   Class A common stock, par value $.01, 150,000,000 shares authorized; 48,217,915
  
   shares issued at September 30, 2007 and 47,454,450 shares issued at June 30, 2007

      482     474  
   Class B common stock, par value $.01, 600,000 shares authorized; no shares
      issued and outstanding at September 30, 2007 and June 30, 2007
      -     -  
   Preferred stock, par value $.01, 1,055,000 shares authorized; no shares issued
      and outstanding at September 30, 2007 and June 30, 2007
      -     -  
   Additional paid-in capital       353,418     330,268  
        353,900     330,742  
   Less: Treasury stock (at cost), 18,450,270 shares at  September 30, 2007 and 
      16,644,582 shares at June 30, 2007
      (557,307 )   (496,005 )

   Retained earnings
      585,168     573,535  
   Accumulated other comprehensive income (notes 8 and 11)       1,866     1,370  
       Total shareholders equity       383,627     409,642  
       Total liabilities and shareholders equity     $ 787,434   $ 802,598  

        See accompanying notes to consolidated financial statements.

2

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)
 

Three Months Ended
September 30,
2007
2006
Net sales     $ 248,727   $ 242,823  
Cost of sales       115,270     116,494  


    Gross profit       133,457     126,329  


Operating expenses:

   
  Selling       57,578     55,038  
  General and administrative       48,082     43,125  
  Restructuring and impairment charge, net (note 5)       -     13,936  


       Total operating expenses       105,660     112,099  


     Operating income 27,797 14,230
               
Interest and other miscellaneous income, net       2,922     2,232  
Interest and other related financing costs (note 8)       2,935     2,938  


    Income before income taxes       27,784     13,524  
Income tax expense       10,280     5,072  


    Net income     $ 17,504   $ 8,452  


Per share data (note 10):    

Basic earnings per common share:
   
    Net income per basic share     $ 0.58   $ 0.27  


    Basic weighted average common shares       30,084     31,815  

Diluted earnings per common share:
   
    Net income per diluted share     $ 0.57   $ 0.26  


    Diluted weighted average common shares       30,464     32,631  

 

See accompanying notes to consolidated financial statements.

 

 

3

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

Three Months Ended
September 30,
2007
2006
Operating activities:            
     Net income     $ 17,504   $ 8,452  
     Adjustments to reconcile net income to net cash provided by operating activities:    
       Depreciation and amortization       5,937     5,604  
       Compensation expense related to share-based awards       132     218  
       Provision (benefit) for deferred income taxes       49     (1,683 )
       Excess tax benefits from share-based payment arrangements       (2,081 )   (1,643 )
       Restructuring and impairment charge, net       -     9,933  
       (Gain) loss on disposal of property, plant and equipment       (552   396  
       Other       69     284  
       Change in assets and liabilities, net of the effects of acquired businesses:    
           Accounts receivable       347     1,251  
           Inventories       587     10,669
           Prepaid expenses and other current assets       1,509   (1,319 )
           Other assets       142     458  
           Customer deposits       4,144   (988
           Accounts payable       1,970   (2,472
           Accrued expenses and other current liabilities       2,552     6,109
           Other long-term liabilities       9,141   31
Net cash provided by operating activities       41,450     35,300  
Investing activities:    
     Proceeds from the disposal of property, plant and equipment       5,063     42  
     Capital expenditures       (12,545 )   (15,652 )
     Acquisitions       (705 )   (6,209 )
     Other       6     38
Net cash used in investing activities       (8,181 )   (21,781 )
Financing activities:    
     Payments on long-term debt       (9 )   (10 )
     Proceeds from issuance of common stock       307     93  
     Excess tax benefits from share-based payment arrangements       2,081     1,643  
     Payment of deferred financing costs       -   (107 )
     Payment of cash dividends       (6,185 )   (5,790 )
     Purchases and other retirements of company stock       (44,101 )   (19,536 )
Net cash used in financing activities      (47,907 )   (23,707
Effect of exchange rate changes on cash       243   23  
Net decrease in cash and cash equivalents       (14,395 )   (10,165
Cash and cash equivalents - beginning of period       147,879     173,801  
Cash and cash equivalents - end of period     $ 133,484   $ 163,636  

See accompanying notes to consolidated financial statements.

4

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders Equity

Three Months Ended September 30, 2007

(Unaudited)

(In thousands, except share data)

Common
Stock

Additional
Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive Income

Retained
Earnings

Total
 
Balance at June 30, 2007     $ 474   $ 330,268   $ (496,005 ) $ 1,370   $ 573,535   $ 409,642  
 
Issuance of 763,465 shares of common stock
 upon exercise of share-based awards
      8     20,937     -     -     -     20,945  
 
Compensation expense associated with
 share-based awards
      -     132     -     -     -     132  
 
Tax benefit associated with exercise of
 share-based awards
      -     2,081     -     -     -     2,081  
 
Purchase/retirement of 1,805,688 shares of
 company stock
      -     -     (61,302 )   -     -     (61,302 )
 

FIN 48 transition adjustment (note 3)

- - - - 683 683
Dividends declared on common stock       -     -     -     -     (6,554 )   (6,554 )
 
Other comprehensive income (notes 8 and 11):    
   Currency translation adjustments       -     -     -     484   -     484
   Reclass of loss on cash-flow hedge, net-of-tax       -     -     -     12     -     12  
Net income       -     -     -     -     17,504     17,504  

   Total comprehensive income                           18,000  






 
Balance at September 30, 2007     $ 482   $ 353,418   $ (557,307 ) $ 1,866   $ 585,168   $ 383,627  







See accompanying notes to consolidated financial statements.

5

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1)

Basis of Presentation

 

Ethan Allen Interiors Inc. ("Interiors") is a Delaware corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of Interiors, its wholly-owned subsidiary Ethan Allen Global, Inc. ("Global"), and Globals subsidiaries (collectively "We", "Us", "Our", "Ethan Allen", or the "Company"). All intercompany accounts and transactions have been eliminated in the consolidated financial statements. All of Globals capital stock is owned by Interiors, which has no assets or operating results other than those associated with its investment in Global.

 

(2)

Interim Financial Presentation

 

All intercompany accounts and transactions have been eliminated in the consolidated financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three months ended September 30, 2007 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended June 30, 2007.

 

Certain prior year amounts have been reclassified in order for them to conform to the current years presentation. These changes were made for disclosure purposes only and did not have any impact on previously reported results of operations or shareholders equity.

 

(3)

Income Taxes -- Adoption of FIN 48

 

Effective July 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes, which provides a comprehensive model for the recognition, measurement, presentation, and disclosure in a companys financial statements of uncertain tax positions taken, or expected to be taken, on a tax return. Under FIN 48, if an income tax position exceeds a more likely than not (i.e. greater than 50%) probability of success upon tax audit, based solely on the technical merits of the position, the company is to recognize an income tax benefit in its financial statements. The tax benefits recognized are to be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. If it is not more than likely than not that the benefit will be sustained on its technical merits, no benefit is to be recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold for purposes of applying FIN 48. Therefore, if it can be established that the only uncertainty is when an item is taken on a tax return, such positions have satisfied the recognition step for purposes of FIN 48 and uncertainty related to timing should be assessed as part of measurement.

 

FIN 48 requires that a liability associated with an unrecognized tax benefit be classified as a long-term liability, except for the amount for which a cash payment is expected to be made within one year. Further, companies are required to accrue interest and related penalties, if applicable, on all tax exposures consistent with the respective jurisdictional tax laws.

 

The adoption of FIN 48 resulted in a non-cash transition (cumulative effect of a change in accounting principle) adjustment of $0.7 million which was recorded as an increase to beginning retained earnings. The transition adjustment is a result, primarily, of tax positions associated with state income tax exposures where the original tax benefit related to periods dating back to 1998. Our continuing practice is to recognize interest and penalties related to income tax matters as a component of income tax expense.

 

6

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

As of July 1, 2007, we had unrecognized income tax benefits totaling $4.8 million and related accrued interest and penalties of $1.4 million (after related tax benefits), all of which was reclassified from current to long-term liabilities upon adoption. If recognized, essentially all of the unrecognized tax benefits and related interest and penalties would be recorded as a benefit to income tax expense. Since adopting FIN 48, our unrecognized tax benefits and related interest and penalties have increased by $0.3 million and $0.2 million, respectively. We do not currently anticipate significant changes in such amounts over the next twelve months.

 

As of July 1, 2007, we remained subject to examination in the following major tax jurisdictions for the tax years indicated below:

Major Tax Jurisdictions

Open Audit Years

North America United States:

 

New York

1998 through 2006

New Jersey

2001 through 2006

Massachusetts

2001 through 2006

North Carolina

2001 through 2006

 

(4)

Inventories

 

Inventories at September 30, 2007 and June 30, 2007 are summarized as follows (in thousands):

 

September 30,
2007

June 30,
2007

 

Finished goods

$150,655

 

$150,994

 

 

Work in process

 

6,290

 

6,172

 

 

Raw materials

 

24,352

 

24,718

 

 

 

 

$181,297

$181,884


Inventories are presented net of a related valuation allowance of $2.7 million at September 30, 2007 and $2.9 million at June 30, 2007.

 

 

(5)

Plant Consolidations

 

In recent years, we have developed, announced and executed plans to consolidate our manufacturing operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage.

 

On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods manufacturing facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional distribution center. In connection with this initiative, we permanently ceased production at both locations, allocating production among our remaining domestic manufacturing locations and selected offshore suppliers. The decision impacted approximately 465 employees with the reduction in headcount occurring during the second and third quarters of fiscal 2007. We recorded a pre-tax restructuring and impairment charge of $14.1 million during the quarter ended September 30, 2006, of which $4.0 million was related to employee severance and benefits and other plant exit costs, and $10.1 million, which was non-cash in nature, was related to fixed asset impairment charges, primarily for real property and machinery and equipment, stemming from the decision to cease production activities. During the three months ended March 31, 2007 and December 31, 2006, adjustments totaling $0.2 million and $0.3 million, respectively, were recorded to reverse remaining previously established accruals which were no longer deemed necessary.  There were no restructuring and impairment charges associated with plant consolidations recorded during the three months ended September 30, 2007.

 

7

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

As of September 30, 2007, all restructuring related obligations for severance and employee benefits have been satisfied and any remaining accrual balances which were deemed unnecessary have been reversed. No restructuring reserves remain in the Consolidated Balance Sheets as accrued expenses within current liabilities. Activity with respect to our September 2006 restructuring reserve is summarized as follows (in thousands):

 

     

 

Original
Charges

Cash
Payments

Non-cash
Utilized

Adjustments

Balance at
September 30,
2007

 

Spruce Pine, NC/Atoka, OK

Employee severance and other
  related payroll and benefit costs

$

3,903

$

(3,455

)

$

-

 

$

(448

)

$

-

 

Other plant exit costs

100

(100

)

-

-

-

Write-down of long-lived assets

10,099

-

(10,099

)

-

-

$

 14,102

$

(3,555

)

$

(10,099

)

$

(448

)

$

-

 

(6)

Business Acquisitions

 

In September 2006, we acquired, in a single transaction, two Ethan Allen retail design centers from an independent retailer for total consideration of approximately $6.3 million. As a result of this acquisition, we recorded additional inventory and other assets (primarily real estate) of $0.9 million and $5.5 million, respectively, and assumed customer deposits and other liabilities of $0.4 million and $0.1 million, respectively. Goodwill associated with this acquisition totaled $0.4 million. There were no acquisitions completed during the three months ended September 30, 2007.  However, the Consolidated Statements of Cash Flows reflect $0.6 million of consideration paid during the period in connection with the acquisition of a retail design center with an effective (closing) date of June 30, 2007 and for which funding did not occur until July 2, 2007.

 

All acquisitions are subject to a contractual holdback, or reconciliation, period, during which the parties to the transaction may agree to certain normal and customary purchase accounting adjustments.

 

Goodwill associated with our acquisitions represents the premium paid to the seller related to the acquired business (i.e. market presence) and other fair value adjustments to the assets acquired and liabilities assumed. Further discussion of our goodwill and other intangible assets can be found in Note 7.

 

A summary of our allocation of purchase price associated with acquisitions occurring during the three months ended September 30, 2006 is provided below (in thousands):

 

Nature of acquisition

 

2 design centers

Total consideration

$

6,272

Fair value of assets acquired and liabilities assumed:

 

 

Inventory

 

948

PP&E and other assets

 

5,460

Customer deposits

 

(410)

A/P and other liabilities

 

  (109)

Goodwill and other intangible assets

$

  383

(7)

Goodwill and Other Intangible Assets

 

As of September 30, 2007, we had goodwill, including product technology, of $73.0 million and other indefinite-lived intangible assets of $19.7 million. Comparable balances as of June 30, 2007 were $72.8 million and $19.7 million, respectively.

 

8

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Goodwill in the wholesale and retail segments was $45.5 million and $27.5 million, respectively, at September 30, 2007 and $45.3 million and $27.5 million, respectively, at June 30, 2007. The wholesale segment, at both dates, includes additional indefinite-lived intangible assets of $19.7 million which represent Ethan Allen trade names.

 

In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, we do not amortize goodwill or other indefinite-lived intangible assets but, rather, evaluate such assets for impairment on an annual basis and between annual tests whenever events or circumstances indicate that the carrying value of the goodwill or other intangible asset may exceed its fair value. We conduct our required annual impairment test during the fourth quarter of each fiscal year. No impairment losses have been recorded on our goodwill or other indefinite-lived intangible assets as a result of applying the provisions of SFAS No. 142.

 

 

(8)

Borrowings

   

Total debt obligations at September 30, 2007 and June 30, 2007 consist of the following (in thousands):

 

September 30,

2007

June 30,

2007

 

5.375% Senior Notes due 2015

$

198,717 $

198,677

Industrial revenue bonds

3,855

3,855

Other debt

367

376

           Total debt

202,939

202,908

Less: current maturities

40

40

           Total long-term debt

$

202,899

$

202,868

 

On September 27, 2005, we completed a private offering of $200.0 million of ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were offered by Global and have an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1 of each year beginning on April 1, 2006. Proceeds received in connection with the issuance of the Senior Notes, net of a related discount of $1.6 million, totaled $198.4 million. We intend to use the net proceeds from the offering to expand our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. As of September 30, 2007, outstanding borrowings related to this transaction have been included in the Consolidated Balance Sheets within long-term debt. The discount on the Senior Notes is being amortized to interest expense over the life of the related debt.

 

In connection with the offering, debt issuance costs totaling $2.0 million were incurred related, primarily, to banking, legal, accounting, rating agency, and printing services. As of September 30, 2007, these costs have been included in the Consolidated Balance Sheets as deferred financing costs within other assets and are being amortized to interest expense over the life of the Senior Notes.

 

Also in connection with the issuance of the Senior Notes, Global, in July and August 2005, entered into 6 separate forward contracts to hedge the risk-free interest rate associated with $108.0 million of the related debt in order to minimize the negative impact of interest rate fluctuations on earnings, cash flows and equity. The forward contracts were entered into with a major banking institution thereby mitigating the risk of credit loss.

 

Upon issuance of the Senior Notes and settlement of the related forward contracts, losses totaling $0.9 million were incurred representing the change in the fair value of the forward contracts since their respective trade dates. In accordance with SFAS No. 133, as amended, it was determined that a portion of the related losses was the result of hedge ineffectiveness and, as such, $0.1 million of the losses was included, within interest and other related financing costs, in the Consolidated Statement of Operations for the fiscal year ended June 30, 2006. The

 

9

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

balance of the losses has been included (on a net-of-tax basis) in the Consolidated Balance Sheets within accumulated other comprehensive income and is being amortized to interest expense over the life of the Senior Notes. The remaining unamortized balance of these forward contract losses totaled $0.6 million ($0.4 million, net-of-tax) at both September 30, 2007 and June 30, 2007.

 

 

(9)

Litigation

 

Environmental Matters  

We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.

 

As of September 30, 2007, we and/or our subsidiaries have been named as a potentially responsible party ("PRP") with respect to the remediation of three active sites currently listed, or proposed for inclusion, on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). The sites are located in Southington, Connecticut; High Point, North Carolina; and Atlanta, Georgia.

 

In addition, during the fiscal year ended June 30, 2007, our liability with respect to a fourth site located in Lyndonville, Vermont was resolved. We had previously received a certificate of construction completion for this location, subject to certain limited conditions which were the obligation of another PRP. In July 2007, we obtained the final certificate of construction completion advising us that all conditions had been met.

 

We do not anticipate incurring significant costs with respect to the Southington, Connecticut, High Point, North Carolina, or Atlanta, Georgia sites as we believe that we are not a major contributor based on the very small volume of waste generated by us in relation to total volume at those sites. Specifically, with respect to the Southington site, our volumetric share is less than 1% of over 51 million gallons disposed of at the site and there are more than 1,000 PRPs. With respect to the High Point site, our volumetric share is less than 1% of over 18 million gallons disposed of at the site and there are more than 2,000 PRPs, including more than 1,000 "de-minimis" parties (of which we are one). With respect to the Atlanta site, a former solvent recycling/reclamation facility, our volumetric share is less than 1% of over 20 million gallons disposed of at the site by more than 1,700 PRPs. In all three cases, the other PRPs consist of local, regional, national and multi-national companies.

 

Liability under CERCLA may be joint and several. As such, to the extent certain named PRPs are unable, or unwilling, to accept responsibility and pay their apportioned costs, we could be required to pay in excess of our pro rata share of incurred remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in the determination of our estimated liability.

 

In addition, in July 2000, we were notified by the State of New York (the "State") that we may be named a PRP in a separate, unrelated matter with respect to a site located in Carroll, New York. To date, no further notice has been received from the State and the State has not yet conducted an initial environmental study at this site.

 

As of September 30, 2007, we believe that established reserves related to these environmental contingencies are adequate to cover probable and reasonably estimable costs associated with the remediation and restoration of these sites.

 

We are subject to other federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters. Such investigations and

 

10

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. We believe that our facilities are in material compliance with all such applicable laws and regulations.

 

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. We will continue to evaluate the most appropriate, cost effective control technologies for finishing operations and design production methods to reduce the use of hazardous materials in the manufacturing process.

 

(10)

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,

2007

2006

 

Weighted average common shares outstanding
       for basic calculation

 

30,084

 

31,815

Effect of dilutive stock options and other

       share-based awards

380

816

Weighted average common shares outstanding,

       adjusted for diluted calculation

30,464

32,631

As of September 30, 2007 and 2006, stock options to purchase 785,326 and 346,981 common shares, respectively, had exercise prices which exceeded the average market price of our common stock for the corresponding periods. These options have been excluded from the respective diluted earnings per share calculation as their impact is anti-dilutive.

 

(11)

Comprehensive Income

 

Total comprehensive income represents the sum of net income and items of "other comprehensive income or loss" that are reported directly in equity. Such items, which are generally presented on a net-of-tax basis, may include foreign currency translation adjustments, minimum pension liability adjustments, fair value adjustments (i.e. gains and losses) on certain derivative instruments, and unrealized gains and losses on certain investments in debt and equity securities. We have reported our total comprehensive income in the Consolidated Statements of Shareholders Equity.

 

Our accumulated other comprehensive income, which is comprised of losses on certain derivative instruments and accumulated foreign currency translation adjustments, totaled $1.9 million at September 30, 2007 and $1.4 million at June 30, 2007. Losses on derivative instruments are the result of cash-flow hedging contracts entered into in connection with the issuance of the Senior Notes (see Note 8). Foreign currency translation adjustments

 

11

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

are the result of changes in foreign currency exchange rates related to our operation of five Ethan Allen-owned retail design centers located in Canada. 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.

 

(12)

Segment Information

 

Our operations are classified into two operating segments: wholesale and retail. These operating segments represent strategic business areas which, although they operate separately and provide their own distinctive services, enable us to more effectively offer our complete line of home furnishings and accessories.

 

The wholesale segment is principally involved in the development of the Ethan Allen brand, which encompasses the design, manufacture, domestic and off-shore sourcing, sale and distribution of a full range of home furnishings and accessories to a network of independently-owned and Ethan Allen-owned design centers as well as related marketing and brand awareness efforts. Wholesale revenue is generated upon the wholesale sale and shipment of our product to all retail design centers, including those owned by Ethan Allen. Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities.

 

The retail segment sells home furnishings and accessories to consumers through a network of Company-owned design centers. Retail revenue is generated upon the retail sale and delivery of our product to our customers. Retail profitability includes (i) the retail gross margin, which represents the difference between the retail sales price and the cost of goods purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities.

 

Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

 

We evaluate performance of the respective segments based upon revenues and operating income. While the manner in which our home furnishings and accessories are marketed and sold is consistent, the nature of the underlying recorded sales (i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing, sourcing, and distribution versus retail selling) are different. Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accessories and other).

 

A breakdown of wholesale sales by these product lines for the three months ended September 30, 2007 and 2006 is provided below:

     

Three Months Ended
September 30,

2007

2006

 

Case Goods

 

47

%

 

45

%

Upholstered Products

37

39

Home Accessories and Other

16

16

100

%

100

%

 

Revenue information by product line is not as easily determined within the retail segment. However, because wholesale production and sales are matched, for the most part, to incoming orders, we believe that the allocation of retail sales by product line would be similar to that of the wholesale segment.

 

12

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Segment information for the three months ended September 30, 2007 and 2006 is set forth below (in thousands):

Three Months Ended
September 30,

2007

2006

Net Sales:

Wholesale segment

$

156,323 

155,641 

Retail segment

182,754 

165,970 

Elimination of inter-company sales

(90,350)

 

(78,788)

 

    Consolidated Total

$

248,727 

$

242,823 


Operating Income:

 

Wholesale segment(1)

$

26,780 

 

11,424 

 

Retail segment

899 

2,843 

Adjustment of inter-company profit (2)

118 

(37)

 

    Consolidated Total

27,797 

 14,230 


Capital Expenditures:

Wholesale segment

2,044 

2,758 

Retail segment

10,501 

12,894 

Acquisitions (3) (4)

96 

6,209 

    Consolidated Total

12,641 

21,861 

  

September 30,

2007

June 30,
2007

Total Assets:

Wholesale segment

$

396,476 

416,237 

Retail segment

429,885 

425,382 

Inventory profit elimination (5)

(38,927)

 

(39,021)

 

   Consolidated Total

$

787,434 

$

802,598 

 

 

(1)

Operating income for the wholesale segment for the three months ended September 30, 2006 includes a pre-tax restructuring and impairment charge, net of $13.9 million.

(2)

Represents the change in the inventory profit elimination entry necessary to adjust for the embedded wholesale profit contained in Ethan Allen-owned design
center inventory existing at the end of the period. See footnote 5 below.

(3)

Amount reflected as acquisitions for 2007 excludes the purchase (for consideration totaling $0.6 million) of a retail design center with an effective (closing) date of
June 30, 2007 and for which funding did not occur until July 2, 2007.

(4)

Amount reflected as acquisitions for 2006 includes the purchase of 2 retail design centers.

(5)

Represents the embedded wholesale profit contained in Ethan Allen-owned design center inventory that has not yet been realized. These profits are realized when the related inventory is sold.

 

There are 37 independent retail design centers located outside the United States. Approximately 2% of our net sales are derived from sales to these retail design centers.

 

 

(13)

Subsequent Events

   

 

Business Acquisitions

On October 1, 2007, we acquired, in a single transaction, two Ethan Allen retail design centers from an independent retailer for total consideration of approximately $2.1 million. As a result of this acquisition, we recorded additional inventory and other assets of $1.9 million and $0.4 million, respectively, and assumed customer deposits and other liabilities of $1.1 million and $0.1 million, respectively. Goodwill associated with this acquisition totaled $1.0 million.

 

13

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

On October 25, 2007, Ethan Allen Operations, Inc., a wholly-owned subsidiary of Global, acquired a cut and sew upholstery facility from Americraft Leather for total consideration of approximately $4.4 million. The facility, which contains 40,000 square feet of manufacturing space and employs 165 people, is located in Silao, in the state of Guanajuato, Mexico. As a result of this acquisition, we recorded additional property, plant and equipment of $2.7 million, and inventory of $1.1 million. Goodwill associated with this acquisition totaled $0.6 million.

 

Stock Repurchases and Remaining Authorization

Subsequent to September 30, 2007 and through November 2, 2007, we repurchased, in 3 separate open market transactions, an additional 0.3 million shares of our common stock at a total cost of $7.8 million, representing an average price per share of $30.10. As of November 2, 2007, we had a remaining Board authorization to repurchase 1.8 million shares.

 

Employment Agreement / Share-Based Awards

On October 10, 2007, the Companys Board of Directors and M. Farooq Kathwari, our President and Chief Executive Officer, agreed to the terms of a new employment agreement expiring on June 30, 2012 (the "Agreement"). Pursuant to the terms of the Agreement, Mr. Kathwari was awarded, on October 10, 2007, options to purchase 150,000 shares of our common stock. These options were issued at an exercise price of $34.03 (the closing price of a share of our common stock on the New York Stock Exchange as of such date), and vest ratably over a 3-year period. The Agreement provides for additional grants of 90,000 and 60,000 shares on July 1, 2008 and July 1, 2009, respectively, with exercise prices equal to the closing price of a share of our common stock on the New York Stock Exchange as of such dates. The 2008 grant will vest ratably over a 2-year period and the 2009 grant will vest ratably over a 1-year period. All options awarded under the Agreement have a contractual term of 10 years.

 

(14)

Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides a single definition of fair value, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement defined as the price that would be received to sell an asset or liability in an orderly transaction between market participants at the measurement date. Thus, SFAS No. 157 adheres to a definition of fair value based upon exit-price as opposed to entry-price (i.e. the price paid to acquire an asset or liability). This authoritative guidance is effective for fiscal years beginning after November 15, 2007 (July 1, 2008 for the Company). As such, we are currently in the process of evaluating the impact of this authoritative guidance on our consolidated financial statements.

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows the Company to choose to measure selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 (July 1, 2008 for the Company). As such, we are currently in the process of evaluating the impact of this authoritative guidance on our consolidated financial statements.

 

 

(15)

Financial Information About the Parent, the Issuer and the Guarantors

 

On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly-owned subsidiaries of the Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc., Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The subsidiary guarantors (other than the Parent) are collectively called the "Guarantors". The guarantees of the Guarantors are unsecured. All of the guarantees are

 

14

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

full, unconditional and joint and several and the Issuer and each of the Guarantors are 100% owned by the Parent. Ethan Allen (UK) Ltd., KEA International Inc. (which was legally dissolved in January 2007), Northeast Consolidated, Inc. (which was legally dissolved in June 2007), Riverside Water Works, Inc. (which was legally dissolved in June 2007), and our other subsidiaries which are not guarantors are called the "Non-Guarantors".

 

The following tables set forth the condensed consolidating balance sheets as of September 30, 2007 and June 30, 2007, the condensed consolidating statements of operations for the three months ended September 30, 2007 and 2006, and the condensed consolidating statements of cash flows for the three months ended September 30, 2007 and 2006 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.

 

15

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

(in thousands)

September 30, 2007

 

Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Assets                            
Current assets:    
  Cash and cash equivalents     $ -   $ 128,830   $ 4,654   $ -   $ -   $ 133,484  
  Accounts receivable, net       -     13,800     442     13     -     14,255  
  Inventories       -     -     220,224     -     (38,927 )   181,297  
  Prepaid expenses and other current assets       -     13,355     20,681     -     -     34,036  
  Intercompany       -     638,543     201,864     -     (840,407 )   -  






       Total current assets       -     794,528     447,865     13     (879,334 )   363,072  
 
Property, plant and equipment, net       -     11,639     314,821     -     -     326,460  
Goodwill and other intangible assets       -     37,905     54,751     -     -     92,656  
Other assets       -     4,062     1,184     -     -     5,246  
Investment in affiliated companies       620,894     142,534     -     -     (763,428 )   -  






       Total assets     $ 620,894   $ 990,668   $ 818,621   $ 13   $ (1,642,762 ) $ 787,434  






 
Liabilities and Shareholders' Equity    
Current liabilities:    
  Current maturities of long-term debt     $ -   $ -   $ 40   $ -   $ -   $ 40  
  Customer deposits       -     -     56,216     -     -     56,216  
  Accounts payable       -     6,531     18,653     -     -     25,184  
  Accrued expenses and other current liabilities       6,683     43,337     18,105     -     -     68,125  
  Intercompany       232,450     43,443     564,462     52     (840,407 )   -  






       Total current liabilities       239,133     93,311     657,476     52     (840,407 )   149,565  
 
Long-term debt       -     198,717     4,182     -     -     202,899  
Other long-term liabilities       -     9,005     12,139     -     -     21,144  
Deferred income taxes - 30,199 - - - 30,199






       Total liabilities       239,133     331,232     673,797     52     (840,407 )   403,807  
 
Shareholders' equity       381,761     659,436     144,824     (39 )   (802,355 )   383,627  






       Total liabilities and shareholders' equity     $ 620,894   $ 990,668   $ 818,621   $ 13   $ (1,642,762 ) $ 787,434  






 

 

 

 

 

 

16

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

(in thousands)

June 30, 2007

 

Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Assets                            
Current assets:    
  Cash and cash equivalents     $ -   $ 142,253   $ 5,626   $ -   $ -   $ 147,879  
  Accounts receivable, net       -     14,118     471     13     -     14,602  
  Inventories       -     -     210,146     10,759     (39,021 )   181,884  
  Prepaid expenses and other current assets       -     15,743     21,969     352     -     38,064  
  Intercompany       -     591,102     195,444     -   (786,546

-







       Total current assets       -     763,216     433,656     11,124     (825,567 )   382,429  
 
Property, plant and equipment, net       -     11,104     311,081     -     -     322,185  
Goodwill and other intangible assets       -     37,905     54,595     -     -     92,500  
Other assets       -     4,299     1,185     -     -     5,484  
Investment in affiliated companies       600,453     149,524     -     -     (749,977 )   -  






       Total assets     $ 600,453   $ 966,048   $ 800,517   $ 11,124   $ (1,575,544 ) $ 802,598  






 
Liabilities and Shareholders' Equity    
Current liabilities:    
  Current maturities of long-term debt     $ -   $ -   $ 40   $ -   $ -   $ 40  
  Customer deposits       -     -     52,072     -     -     52,072  
  Accounts payable       3,436     6,509     12,732     3,973     -     26,650  
  Accrued expenses and other current liabilities       6,286     47,471     14,920     -     -     68,677  
  Intercompany       182,458     43,443     553,479     7,166     (786,546 )   -  






       Total current liabilities       192,180     97,423     633,243     11,139     (786,546 )   147,439  
 
Long-term debt       -     198,676     4,192     -     -     202,868  
Other long-term liabilities       -     227     11,776     -     -     12,003  
Deferred income taxes       -     30,646     -     -     -

30,646







       Total liabilities       192,180     326,972     649,211     11,139     (786,546 )   392,956  
 
Shareholders' equity       408,273     639,076     151,306     (15 )   (788,998 )   409,642  






       Total liabilities and shareholders' equity     $ 600,453   $ 966,048   $ 800,517   $ 11,124   $ (1,575,544 ) $ 802,598  






 

 

17

 

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)


CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(in thousands)

Three Months Ended September 30, 2007

Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
 Net sales     $ -   $ 156,547   $ 250,964   $ -   $ (158,784 ) $ 248,727  
 Cost of sales       -     110,533     163,641     -     (158,904 )   115,270  






    Gross profit       -     46,014     87,323     -     120     133,457  
 
 Selling, general and administrative expenses       41     11,004     94,615     -     -     105,660  
 Restructuring and impairment charge, net       -     -     -     -     -     -  






    Total operating expenses       41     11,004     94,615     -     -     105,660  






      Operating income (loss)       (41 )   35,010     (7,292 )   -     120     27,797  
 
Interest and other miscellaneous income, net       17,545     (4,456 )   414     -     (10,581 )   2,922  
Interest and other related financing costs       -     2,859     76     -     -     2,935  






    Income before income tax expense       17,504     26,540     (6,954 )   -     (10,461 )   27,784  
Income tax expense       -     10,244     36     -     -     10,280  






 
    Net income (loss)     $ 17,504   $ 17,451   $ (6,990 ) $ -   $ (10,461 ) $ 17,504  






Three Months Ended September 30, 2006

Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
 Net sales     $ -   $ 154,927   $ 239,164   $ -   $ (151,268 ) $ 242,823  
 Cost of sales       -     108,888     158,798     5     (151,197 )   116,494  
    Gross profit       -     46,039     80,366     (5 )   (71 )   126,329  
 
 Selling, general and administrative expenses       41     11,468     86,651     3     -     98,163  
 Restructuring and impairment charge, net       -     -     13,936     -     -     13,936  
    Total operating expenses       41     11,468     100,587     3     -     112,099  
      Operating income (loss)       (41 )   34,571     (20,221 )   (8 )   (71 )   14,230  
 
Interest and other miscellaneous income, net       8,493     (18,322 )   (172 )   12     12,221     2,232  
Interest and other related financing costs       -     2,862     76     -     -     2,938  
    Income before income tax expense       8,452     13,387     (20,469 )   4     12,150     13,524  
Income tax expense       -     4,785     287     -     -     5,072  
 
    Net income (loss)     $ 8,452   $ 8,602   $ (20,756 ) $ 4   $ 12,150   $ 8,452  






 

 

18

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(in thousands)

Three Months Ended September 30, 2007

 

 

Parent
Issuer
Guarantors
Non-Guarantors
Eliminations
Consolidated
Net cash provided by (used in) operating activities     $ 49,979   $ (14,216 ) $ 5,687   $ -   $ -   $ 41,450  






Cash flows from investing activities:    
 Capital expenditures       -     (1,294 )   (11,251 )   -     -     (12,545 )
 Acquisitions       -     -     (705 )   -     -     (705 )
 Proceeds from the disposal of property, plant and    
    equipment       -     -     5,063     -     -     5,063  
 Other       -     6     -     -     -     6  






    Net cash used in investing activities       -     (1,288 )   (6,893 )   -     -     (8,181 )






Cash flows from financing activities:    
 Payments on long-term debt       -     -