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Ethan Allen Interiors 10-Q 2012

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
eth_10q-123111.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended December 31, 2011

OR

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

For the transition period from __________ to __________
 
    Commission File Number:  1-11692
 
               Ethan Allen Interiors Inc.            
(Exact name of registrant as specified in its charter)
 
Delaware   06-1275288  
(State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)  
       
Ethan Allen Drive, Danbury, Connecticut   06811  
(Address of principal executive offices)   (Zip Code)  
 
(203) 743-8000
 (Registrant's telephone number, including area code)
 
N/A 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    [X] Yes[   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    [X] Yes [   ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act

Large accelerated filer                                        [   ]
Accelerated filer                                                 [X]
 
Non-accelerated filer                                          [   ]
Smaller reporting company                                                 [   ]
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).[   ] Yes[X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

At January 25, 2012, there were 28,853,322 shares of Class A Common Stock,
par value $.01, outstanding.

 
 

 
TABLE OF CONTENTS
 
 
Item   Page
  Part I – Financial Information  
     
1.  
    2
      Consolidated Balance Sheets  
    3
      Consolidated Statements of Operations  
    4
      Consolidated Statements of Cash Flows  
    5
      Consolidated Statements of Shareholders' Equity  
    6
      Notes to Consolidated Financial Statements  
     
2. 21
     
3. Quantitative and Qualitative Disclosures About Market Risk 30
     
4. Controls and Procedures 30
     
     
   
     
1. Legal Proceedings 31
     
1A. Risk Factors 31
     
2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
3. Defaults Upon Senior Securities 31
     
4. [Reserved] 31
     
5. Other Information 31
     
6. Exhibits 31
     
     
  Signatures 32
 

Item 1. Financial Statements
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
   
December 31, 2011
   
June 30, 2011
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 66,352     $ 78,519  
Marketable securities (note 5)
    11,016       12,909  
Accounts receivable, less allowance for doubtful accounts of $1,199 at December 31, 2011 and $1,171 at June 30, 2011
    13,828       15,036  
Inventories (note 6)
    136,197       141,692  
Prepaid expenses and other current assets
    20,330       20,372  
Total current assets
    247,723       268,528  
Property, plant and equipment, net
    291,098       294,853  
Goodwill and other intangible assets
    45,128       45,128  
Restricted cash and investments (note 4)
    15,402       16,391  
Other assets
    3,020       3,425  
Total assets
  $ 602,371     $ 628,325  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Current maturities of long-term debt (note 9)
  $ -     $ 19  
Customer deposits
    46,561       62,649  
Accounts payable
    22,452       26,958  
Accrued compensation and benefits
    28,884       28,359  
Accrued expenses and other current liabilities (note 7)
    32,709       36,631  
Total current liabilities
    130,606       154,616  
Long-term debt (note 9)
    152,924       165,013  
Other long-term liabilities
    20,340       18,975  
Deferred income taxes
    8,067       8,034  
Total liabilities
    311,937       346,638  
Shareholders' equity:
               
Class A common stock, par value $0.01; 150,000,000 shares authorized; 48,473,470 shares issued at December 31, 2011 and 48,350,065 shares issued at June 30, 2011
    485       484  
Class B common stock, par value $0.01; 600,000 shares authorized; no shares issued and outstanding at  December 31, 2011 and June 30, 2011
    -       -  
Preferred stock, par value $0.01; 1,055,000 shares authorized; no shares issued and outstanding at December 31, 2011 and June 30, 2011
    -       -  
Additional paid-in-capital
    360,492       359,728  
                 
Less: Treasury stock (at cost), 19,623,385 shares at December 31, 2011 and 19,571,092 shares at June 30, 2011
    (583,538 )     (582,691 )
Retained earnings
    512,704       501,908  
Accumulated other comprehensive income (note 13)
    45       2,258  
Total Ethan Allen Interiors Inc. shareholders' equity
    290,188       281,687  
Noncontrolling interests
    246       -  
Total shareholders equity
    290,434       281,687  
Total liabilities and shareholders' equity
  $ 602,371     $ 628,325  
 
See accompanying notes to consolidated financial statements.
     
 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(In thousands, except per share data)

   
Three months ended
   
Six months ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net sales
  $ 183,275     $ 173,345     $ 368,196     $ 338,186  
Cost of sales
    85,056       83,484       172,092       165,944  
Gross profit
    98,219       89,861       196,104       172,242  
Operating expenses:
                               
Selling
    42,246       40,068       85,866       79,395  
General and administrative
    42,006       39,259       82,673       76,702  
Restructuring and impairment charge, net (note 7)
    29       59       (11 )     284  
Total operating expenses
    84,281       79,386       168,528       156,381  
Operating income
    13,938       10,475       27,576       15,861  
Interest and other miscellaneous income, net
    145       1,168       205       4,325  
Interest and other related financing costs (note 9)
    2,274       2,902       4,625       5,876  
Income before income taxes
    11,809       8,741       23,156       14,310  
Income tax expense (benefit) (note 3)
    3,732       (6,003 )     8,309       (4,247 )
Net income
  $ 8,077     $ 14,744     $ 14,847     $ 18,557  
Per share data (note 12):
                               
Basic earnings per common share:
                               
Net income  per basic share
  $ 0.28     $ 0.51     $ 0.52     $ 0.65  
Basic weighted average common shares
    28,823       28,728       28,791       28,753  
Diluted earnings per common share:
                               
Net income per diluted share
  $ 0.28     $ 0.51     $ 0.51     $ 0.64  
Diluted weighted average common shares
    29,069       28,921       29,010       28,936  
 
See accompanying notes to consolidated financial statements.
           
 
 
ETHAN ALLEN INTERIORS INC.
Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
     
Six months ended
 
     
December 31,
 
     
2011
     
2010
 
Operating activities:
               
Net income
  $ 14,847     $ 18,557  
Adjustments to reconcile net income to net
cash provided by operating activities:
               
Depreciation and amortization
    9,582       10,929  
Compensation expense related to share-based awards
    743       436  
Provision (benefit) for deferred income taxes
    6       (11 )
(Gain) loss on disposal of property, plant and equipment
    1,617       273  
Other
    162       (90 )
Change in assets and liabilities, net of the effects from acquired and divested businesses:
               
Accounts receivable
    956       2,429  
Inventories
    5,973       (2,664 )
Prepaid and other current assets
    85       (10,726 )
Other assets
    83       388  
Customer deposits
    (16,408 )     (13,843 )
Accounts payable
    (4,506 )     (2,037 )
Accrued expenses
    (3,540 )     351  
Other liabilities
    1,365       (1,220 )
Net cash provided by (used in) operating activities
    10,965       2,772  
                 
Investing activities:
               
Proceeds from the disposal of property, plant & equipment
    1,792       99  
Change in restricted cash and investments
    989       981  
Capital expenditures
    (11,392 )     (4,157 )
Purchases of marketable securities
    (2,108 )     (6,358 )
Sales of marketable securities
    3,825       1,000  
Other
    769       (218 )
Net cash provided by (used in) investing activities
    (6,125 )     (8,653 )
                 
Financing activities:
               
Payments on long-term debt
    (12,128 )     (6,655 )
Proceeds from issuance of common stock
    22       -  
Proceeds from non controlling interest
    275       -  
Payment of cash dividends
    (4,031 )     (2,876 )
Purchases and other retirements of company stock
    (847 )     (5,377 )
Net cash provided by (used in) financing activities
    (16,709 )     (14,908 )
Effect of exchange rate changes on cash
    (298 )     (32 )
Net increase (decrease) in cash & cash equivalents
    (12,167 )     (20,821 )
Cash & cash equivalents at beginning of period
    78,519       73,852  
Cash & cash equivalents at end of period
  $ 66,352     $ 53,031  
 
See accompanying notes to consolidated financial statements.
   
 
 
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders’ Equity
 Six Months Ended December 31, 2011
(Unaudited)
(In thousands, except share data)

   
Common
Stock
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Accumulated
Other
Comprehensive
Income
   
Retained
Earnings
   
Non-
Controlling
Interests
   
Total
 
Balance at June 30, 2011
  $ 484     $ 359,728     $ (582,691 )   $ 2,258     $ 501,908     $ -     $ 281,687  
Issuance of common shares upon the exercise of share-based awards
    1       21       -       -       -               22  
Compensation expense associated with share-based awards (note 11)
    -       743       -       -       -               743  
Purchase/retirement of 52,293 shares of company stock
    -       -       (847 )     -       -               (847 )
Dividends declared on common stock
    -       -       -       -       (4,051 )             (4,051 )
Increase from business combination
                                            275       275  
Other comprehensive income (note 13):
                                                       
Currency translation adjustments
    -       -       -       (2,241 )     -               (2,241 )
Unrealized gain (loss) on investments
    -       -       -       (3 )     -               (3 )
Loss on derivatives, net of tax
    -       -       -       31       -               31  
Net income
    -       -       -       -       14,847       (29 )     14,818  
Total comprehensive income
                                                    12,605  
Balance at December 31, 2011
  $ 485     $ 360,492     $ (583,538 )   $ 45     $ 512,704     $ 246     $ 290,434  
 
See accompanying notes to consolidated financial statements.
                   
 
 
 
5

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(1) Basis of Presentation

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

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates. Areas in which significant estimates have been made include, but are not limited to, revenue recognition, the allowance for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property, plant and equipment and intangible assets, goodwill and indefinite-lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in business combinations.

In October 2011 the Company and one of its independent retailers formed a new business entity which began operating a new Ethan Allen design center in Florida. Our consolidated financial statements include the accounts of this entity because we are a majority shareholder and have the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the net income (loss) of this entity of ($29 thousand) net of tax, for the three and six months ended December 31, 2011, is included in the Consolidated Statement of Operations within interest and other miscellaneous income, net. Additionally, changes to noncontrolling investment interests of $0.2 million are presented in the equity section of the Consolidated Balance Sheets at December 31, 2011.


In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and six months ended December 31, 2011 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, 2011.

(3)     Income Taxes

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are not normal and are non-recurring in nature and treats these as discrete events. The tax effect of discrete items is recorded in the quarter in which the discrete events occur. Due to the volatility of these factors, the Company's consolidated effective income tax rate can change significantly on a quarterly basis.

The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, the Company is subject to examination by the taxing authorities in such major jurisdictions as the U.S., Canada, and Mexico. As of December 31, 2011, the Company and certain of its subsidiaries are currently under U.S. and Canada audit from 2001 through 2010. It is reasonably possible that some of these audits may be completed during the next twelve months. It is reasonable to expect that various issues relating to uncertain tax benefits will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

 
6

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
Due to the challenging economic times, financial losses in fiscal 2009 and 2010 resulting in a three year cumulative loss, and after considering both positive and negative evidence, management’s assessment is that realization of tax assets is not reasonably assured due to a lack of available objective positive evidence. As a result, the Company established a full valuation allowance as of June 30, 2010. At December 31, 2011, the Company remains in a three year cumulative loss and the full valuation allowance remains in place with a balance of $23.9 million compared with $23.5 million at June 30, 2011. Management will continue to assess the realizability of the tax assets based on actual and forecasted operating results on a quarterly basis, which will likely cause volatility in the effective tax rate of the Company.

The Company’s consolidated effective tax rate was 31.6% and 35.9% for the three and six months ended December 31, 2011 respectively, and negative 68.7% and negative 29.7% for the three and six months ended December 31, 2010 respectively. The current quarter effective tax rate includes tax expense on the current quarter’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets which also affected the income tax expense in both periods. The prior period effective tax rate benefitted from the utilization of certain deferred tax assets.

(4)     Restricted Cash and Investments

At December 31, 2011 and June 30, 2011, we held $15.4 million and $16.4 million respectively, of restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our workmen’s compensation and other insurance and for the benefit of the issuer of our private label credit card. These funds can be invested in high quality money market mutual funds, U.S. Treasuries and U.S. Government agency fixed income instruments, and cannot be withdrawn without the prior written consent of the secured party. These assets are carried at cost, which approximates market value and are classified as long-term assets because they are not expected to be used within one year to fund operations. See also Note 5, “Marketable Securities” and Note 14, “Financial Instruments".

(5)     Marketable Securities

At December 31, 2011 and June 30, 2011, the Company held marketable securities of $11.0 million and $12.9 million respectively, classified as current assets, consisting of U.S. municipal bonds with maturities ranging from less than one year to less than two years, which were rated A/A1 or better by the rating services Standard & Poors (“S&P”) and Moodys Investors Service (“Moodys”) respectively. There have been no material realized or unrealized gains or losses for the six months ended December 31, 2011 and December 31, 2010. We do not believe there are any impairments considered to be other than temporary at December 31, 2011. Also see Note 4, "Restricted Cash and Investments" and Note 14, “Financial Instruments".

 
7

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(6)     Inventories

Inventories at December 31, 2011 and June 30, 2011 are summarized as follows (in thousands):
 
   
December 31,
   
June 30,
 
   
2011
   
2011
 
             
Finished goods
  $ 103,742     $ 108,438  
Work in process
    8,596       8,868  
Raw materials
    23,859       24,386  
    $ 136,197     $ 141,692  
 
Inventories are presented net of a related valuation allowance of $3.1 million at December 31, 2011 and $1.7 million at June 30, 2011.

(7)     Restructuring and Impairment Charges

In recent years, we have announced and executed plans to consolidate our operations as part of an overall strategy to maximize production efficiencies and maintain our competitive advantage. Plans announced in fiscal 2008 and 2009 had no material impact on fiscal 2012 financial statements and the balance of reserves for these actions, for non-cancellable lease obligations with expirations ranging from less than two to 22 years, totaled $1.6 million and $2.5 million at December 31, 2011 and June 30, 2011 respectively.

(8)     Business Acquisitions and Joint Ventures

From time to time the Company acquires design centers from its independent retailers in arms length transactions. There were no material acquisitions completed during the six months ended December 31, 2011 or 2010 respectively. In October 2011, the Company and one if its independent retailers formed a joint venture which began operating a new Ethan Allen design center in Florida during the quarter ended December 31, 2011. The Company contributed $0.8 million for a 75% interest in the joint venture. The independent retailer holds a non-controlling interest.

 (9)     Borrowings

Total debt obligations at December 31, 2011 and June 30, 2011 consist of the following (in thousands):

   
December 31,
   
June 30,
 
   
2011
   
2011
 
5.375% Senior Notes due 2015
  $ 152,924     $ 164,821  
Other debt
    -       211  
   Total debt
    152,924       165,032  
Less current maturities
    -       19  
   Total long-term debt
  $ 152,924     $ 165,013  
 
In September 2005, we issued $200.0 million in ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We have used the net proceeds of $198.4 million to improve our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. During fiscal 2011, the Company reduced its outstanding debt by $38.2 million. Outstanding debt was further reduced by $12.1 million during the current fiscal year.

 
8

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). At December 31, 2011 and June 30, 2011, we had no revolving loans and $0.7 million of standby and trade letters of credit outstanding under the Facility. The Facility is subject to borrowing base availability and includes a right for the Company to increase the total facility to $100 million subject to certain conditions. The Facility is secured by all property owned, leased or operated by the Company in the United States excluding any real property owned by the Company and contains customary covenants which may limit the Company’s ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. Remaining availability under the facility totaled $49.3 million at December 31, 2011 and June 30, 2011 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.

At December 31, 2011 and June 30, 2011, we were in compliance with all covenants of the Senior Notes and the Facility.

(10)      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 December 31, 2011 and June 30, 2011, we believe that the Company was adequately reserved. We believe our currently anticipated capital expenditures for environmental control facility matters are not material.

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 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.

(11)      Share-Based Compensation

Effective October 1, 2011, the Company and M. Farooq Kathwari, our President and Chief Executive Officer, entered into a new employment agreement (the "Agreement"). Pursuant to the terms of the Agreement, Mr. Kathwari was awarded on October 1, 2011, (i) options to purchase 300,000 shares of our common stock at an exercise price of $13.61 (the closing price of a share of our common stock on September 30, 2011), and (ii) 105,000 shares of restricted stock, with both awards vesting ratably over a 5-year period on each June 30, unless earlier vested, in certain circumstances, in accordance with the terms of the Agreement. During the quarter ended September 30, 2011, the Company awarded options to purchase 30,000 shares of our common stock to certain executives other than Mr. Kathwari, at the closing stock price on the respective grant dates. These options vest in four equal annual installments on the grant date anniversary. On July 26, 2011, as a result of the Company’s performance, the Compensation Committee of the Company’s board of directors awarded Mr. Kathwari 30,000 service-based restricted shares, which vest in three equal annual installments on the grant date anniversary.

 
9

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(12)     Earnings Per Share

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

   
Three months ended
   
Six months ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Weighted average common shares outstanding for basic calculation
    28,823       28,728       28,791       28,753  
Effect of dilutive stock options and other share-based awards
    246       193       219       183  
Weighted average common shares outstanding adjusted for dilution calculation
    29,069       28,921       29,010       28,936  
 
As of December 31, 2011 and 2010, stock options to purchase 1,666,700 and 1,922,853 common shares, respectively, were excluded from the respective diluted earnings per share calculation because their impact was anti-dilutive.

(13)     Comprehensive Income

Our accumulated other comprehensive income, which is comprised of losses on certain derivative instruments, accumulated foreign currency translation adjustments, and unrealized gain and loss on investments totaled less than $0.1 million at December 31, 2011 and $2.3 million at June 30, 2011. Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operations in Canada and Mexico, and, during the quarter ended December 2011, a plant under development in Honduras. 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.

(14)     Fair Value Measurements
 
We determine fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value is calculated based on assumptions that market participants use in pricing the asset or liability, and not on assumptions specific to the Company. In addition, the fair value of liabilities includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in one of three levels, determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
 
 
Level 1
Inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
 
 
10

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
 
Level 2
Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
Level 3
Inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.
 
The following section describes the valuation methodologies we use to measure different financial assets and liabilities at fair value.
 
Assets and Liabilities Measured at Fair Value on a Recurring Basis
 
The following table presents our assets and liabilities measured at fair value on a recurring basis at December 31, 2011 and June 30, 2011 (in thousands):
 
December 31, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Balance
 
Cash equivalents
  $ 81,754       -       -     $ 81,754  
Available-for-sale securities
    -       11,016       -       11,016  
Total
  $ 81,754     $ 11,016     $ -     $ 92,770  
 
 
June 30, 2011
 
   
Level 1
   
Level 2
   
Level 3
   
Balance
 
Cash equivalents
  $ 94,910       -       -     $ 94,910  
Available-for-sale securities
    -       12,909       -       12,909  
Total
  $ 94,910     $ 12,909     $ -     $ 107,819  
 
Cash equivalents consist of money market accounts and mutual funds in U.S. government and agency fixed income securities. We use quoted prices in active markets for identical assets or liabilities to determine fair value. At December 31, 2011 and June 30, 2011, $15.4 million and $16.4 million, respectively, of the cash equivalents were restricted, and classified as a long-term asset.
 
Available-for-sale securities consist of U.S. municipal bonds with maturities of less than two years. The municipal bonds are rated A/A1 or better by S&P/Moodys respectively. As of December 31, 2011 and December 31, 2010, there were no material gross unrealized gains or losses on available-for-sale securities.
 
As of December 31, 2011 and June 30, 2011, the contractual maturities of our available-for-sale investments were as follows:
 
 
11

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
December 31, 2011
 
   
Cost
   
Estimated Fair Value
 
Due in one year or less
  $ 7,590     $ 7,696  
Due after one year through five years
  $ 3,281     $ 3,320  
 
June 30, 2011
 
   
Cost
   
Estimated Fair Value
 
Due in one year or less
  $ 7,311     $ 7,393  
Due after one year through five years
  $ 5,428     $ 5,517  
 
No investments have been in a continuous loss position for more than one year, and no other-than-temporary impairments were recognized. Also see Note 4, "Restricted Cash and Investments", and Note 5, "Marketable Securities".

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
 
We measure certain assets at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the six month periods ended December 31, 2011 and  2010, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis.

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

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

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

We evaluate performance of the respective segments based upon revenues and operating income. While the manner in which our home furnishings and accessories are marketed and sold is consistent, the nature of the underlying recorded sales (i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing, sourcing, and distribution versus retail selling) are different. Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accessories and other). The allocation of retail sales by product line is reasonably similar to that of the wholesale segment. A breakdown of wholesale sales by these product lines for the three and six months ended December 31, 2011 and 2010 is provided as follows:
 
 
12

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
   
Three months ended
   
Six months ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Case Goods
    39 %     40 %     39 %     38 %
Upholstered Products
    44 %     46 %     45 %     47 %
Home Accessories and Other
    17 %     14 %     16 %     15 %
      100 %     100 %     100 %     100 %
 
Segment information for the three and six months ended December 31, 2011 and 2010 is provided below (in thousands):
 
   
Three months ended
   
Six months ended
 
   
December 31,
   
December 31,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Wholesale segment
  $ 106,631     $ 100,793     $ 223,025     $ 208,348  
Retail segment
    143,104       131,014       284,285       252,037  
Elimination of inter-company sales
    (66,460 )     (58,462 )     (139,114 )     (122,199 )
Consolidated Total
  $ 183,275     $ 173,345     $ 368,196     $ 338,186  
                                 
Operating income (loss):
                               
Wholesale segment
  $ 15,702     $ 9,884     $ 31,393     $ 21,823  
Retail segment (1)(2)
    (2,532 )     (1,206 )     (4,029 )     (5,496 )
Adjustment of inter-company profit (3)
    768       1,797       212       (466 )
Consolidated Total
  $ 13,938     $ 10,475     $ 27,576     $ 15,861  
                                 
Depreciation & Amortization:
                               
Wholesale segment
  $ 1,780     $ 2,394     $ 3,984     $ 4,963  
Retail segment
    2,813       2,928       5,598       5,966  
Consolidated Total
  $ 4,593     $ 5,322     $ 9,582     $ 10,929  
                                 
Capital expenditures:
                               
Wholesale segment
  $ 6,598     $ 1,595     $ 8,403     $ 2,686  
Retail segment
    1,419       1,058       2,989       1,471  
Consolidated Total
  $ 8,017     $ 2,653     $ 11,392     $ 4,157  
                             
   
December 31,
   
June 30,
                 
      2011       2011                  
Total Assets:
                               
Wholesale segment
  $ 297,169     $ 309,081                  
Retail segment
    332,545       347,044                  
Inventory profit elimination (4)
    (27,343 )     (27,800 )                
Consolidated Total
  $ 602,371     $ 628,325                  
 
 
13

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
 
(1)
Operating income (loss) for the retail segment for the three months ended December 31, 2010 includes pre-tax restructuring and impairment charges of $0.1 million.
(2)
Operating income (loss) for the retail segment for the six months ended December 31, 2010 includes pre-tax restructuring and impairment charges of  $0.3 million.
(3)
Represents the change in wholesale profit contained in Ethan Allen operated design center inventory at the end of the period.
(4)
Represents the wholesale profit contained in Ethan Allen operated design center inventory that has not yet been realized. These profits are realized when the related inventory is sold.
 
At December 31, 2011, there were 84 independent retail design centers located outside the United States compared with 61 at December 31, 2010. Approximately 5.6% of our net sales during the current six months were derived from sales to these retail design centers compared with 6.2% in the prior year.

(16)     Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Presentation of Comprehensive Income”. This ASU increases the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments do not change the items that must be reported in other comprehensive income. This ASU is effective for annual and interim periods beginning on or after December 15, 2011 (July 1, 2012 for the Company), and must be applied retrospectively.

(17)     Financial Information About the Parent, the Issuer and the Guarantors
 
On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly owned domestic subsidiaries of the Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc., Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The subsidiary guarantors (other than the Parent) are collectively called the "Guarantors". The guarantees of the Guarantors are unsecured. All of the guarantees are full, unconditional and joint and several and the Issuer and each of the Guarantors are 100% owned by the Parent. Our other subsidiaries which are not guarantors are called the "Non-Guarantors".

The following tables set forth the condensed consolidating balance sheets as of December 31, 2011 and June 30, 2011, the condensed consolidating statements of operations for the three and six months ended December 31, 2011 and 2010, and the condensed consolidating statements of cash flows for the six months ended December 31, 2011 and 2010 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.
 
 
 
14

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
December 31, 2011
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                                   
Current assets:
                                   
  Cash and cash equivalents
  $ -     $ 58,255     $ 5,625     $ 2,472     $ -     $ 66,352  
  Marketable securities
    -       11,016       -       -       -       11,016  
  Accounts receivable, net
    -       13,359       469       -       -       13,828  
  Inventories
    -       -       159,124       4,416       (27,343 )     136,197  
  Prepaid expenses and other current assets
    -       6,275       11,718       2,337       -       20,330  
  Intercompany receivables
    -       808,523       262,217       (13,955 )     (1,056,785 )     -  
     Total current assets
    -       897,428       439,153       (4,730 )     (1,084,128 )     247,723  
Property, plant and equipment, net
    -       8,380       269,110       13,608       -       291,098  
Goodwill and other intangible assets
    -       37,905       7,223       -       -       45,128  
Restricted cash and investments
    -       15,402       -       -       -       15,402  
Other assets
    -       2,260       760       -       -       3,020  
Investment in affiliated companies
    616,411       (99,697 )     -       -       (516,714 )     -  
     Total assets
  $ 616,411     $ 861,678     $ 716,246     $ 8,878     $ (1,600,842 )   $ 602,371  
Liabilities and Shareholders’ Equity
                                               
Current liabilities:
                                               
  Customer deposits
  $ -     $ -     $ 44,459     $ 2,102     $ -     $ 46,561  
  Accounts payable
    -       6,420       15,814       218       -       22,452  
  Accrued expenses and other current liabilities
    2,152       43,516       15,127       798       -       61,593  
  Intercompany payables
    323,825       597       727,969       4,394       (1,056,785 )     -  
     Total current liabilities
    325,977       50,533       803,369       7,512       (1,056,785 )     130,606  
Long-term debt
    -       152,924       -       -       -       152,924  
Other long-term liabilities
    -       6,253       13,995       92       -       20,340  
Deferred income taxes
    -       8,067       -       -       -       8,067  
     Total liabilities
    325,977       217,777       817,364       7,604       (1,056,785 )     311,937  
Shareholders’ equity
    290,434       643,901       (101,118 )     1,274       (544,057 )     290,434  
     Total liabilities and shareholders’ equity
  $ 616,411     $ 861,678     $ 716,246     $ 8,878     $ (1,600,842 )   $ 602,371  
 
 
15

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
(In thousands)
June 30, 2011
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Assets
                                   
Current assets:
                                   
  Cash and cash equivalents
  $ -     $ 69,763     $ 7,716     $ 1,040     $ -     $ 78,519  
  Marketable securities
    -       12,909       -       -       -       12,909  
  Accounts receivable, net
    -       13,609       174       1,253       -       15,036  
  Inventories
    -       -       164,938       4,554       (27,800 )     141,692  
  Prepaid expenses and other current assets
    -       4,598       14,866       908       -       20,372  
  Intercompany receivables
    -       784,285       249,461       (8,423 )     (1,025,323 )     -  
     Total current assets
    -       885,164       437,155       (668 )     (1,053,123 )     268,528  
Property, plant and equipment, net
    -       8,023       276,057       10,773       -       294,853  
Goodwill and other intangible assets
    -       37,905       7,223       -       -       45,128  
Restricted cash and investments
    -       16,391       -       -       -       16,391  
Other assets
    -       2,700       725       -       -       3,425  
Investment in affiliated companies
    602,699       (93,132 )     -       -       (509,567 )     -  
     Total assets
  $ 602,699     $ 857,051     $ 721,160     $ 10,105     $ (1,562,690 )   $ 628,325  
Liabilities and Shareholders’ Equity
                                               
Current liabilities:
                                               
  Current maturities of long-term debt
  $ -     $ -     $ 19     $ -     $ -     $ 19  
  Customer deposits
    -       -       59,633       3,016       -       62,649  
  Accounts payable
    -       7,333       19,233       392       -       26,958  
  Accrued expenses and other current liabilities
    2,130       43,212       18,746       902       -       64,990  
  Intercompany payables
    318,882       597       702,748       3,096       (1,025,323 )     -  
     Total current liabilities
    321,012       51,142       800,379       7,406       (1,025,323 )     154,616  
Long-term debt
    -       164,832       181       -       -       165,013  
Other long-term liabilities
    -       4,392       14,474       109       -       18,975  
Deferred income taxes
    -       8,034       -       -       -       8,034  
     Total liabilities
    321,012       228,400       815,034       7,515       (1,025,323 )     346,638  
Shareholders’ equity
    281,687       628,651       (93,874 )     2,590       (537,367 )     281,687  
     Total liabilities and shareholders’ equity
  $ 602,699     $ 857,051     $ 721,160     $ 10,105     $ (1,562,690 )   $ 628,325  
 
 
16

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
Three months ended December 31, 2011
   
Parent
   
Issuer
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 106,087     $ 196,556     $ 8,533     $ (127,901 )   $ 183,275  
    Cost of sales
    -       78,863       130,514       4,503       (128,824 )     85,056  
    Gross profit
    -       27,224       66,042       4,030       923       98,219  
                                                 
Selling, general and administrative expenses
    45       10,699       70,117       3,391       -       84,252  
Restructuring and impairment charge, (credit) net
    -       -       29       -       -       29  
    Total operating expenses
    45       10,699       70,146       3,391       -       84,281  
Operating income (loss)
    (45 )     16,525       (4,104 )     639       923       13,938  
                                                 
    Interest and other miscellaneous income, net
    8,122       (3,451 )     89       6       (4,621 )     145  
    Interest and other related financing costs
    -       2,274       -       -       -       2,274  
    Income before income tax expense
    8,077       10,800       (4,015 )     645       (3,698 )     11,809  
    Income tax expense
    -       3,601       124       7       -       3,732  
                                                 
    Net income/(loss)
  $ 8,077     $ 7,199     $ (4,139 )   $ 638     $ (3,698 )   $ 8,077  
 
Three months ended December 31, 2010
    Parent     Issuer     Guarantors    
Non-Guarantors
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 100,980     $ 182,505     $ 7,899     $ (118,039 )   $ 173,345  
    Cost of sales
    -       77,387       121,588       4,271       (119,762 )     83,484  
    Gross profit
    -       23,593       60,917