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, 2016

 

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 [X]	Accelerated filer                    [   ]
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 20, 2017, there were 27,690,177 shares of Common Stock, par value $.01, outstanding.

 

 

Table of Contents

 

 

	PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets		2
Consolidated Statements of Comprehensive Income		3
Consolidated Statements of Cash Flows		4
Consolidated Statements of Shareholders’ Equity		5
Notes to Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
	PART II - OTHER INFORMATION
Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Mine Safety Disclosures		23
Item 5. Other Information		23
Item 6. Exhibits		24
SIGNATURES		25

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In thousands)

 

		December 31, 2016				June 30, 2016
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	57,149			$	52,659
Accounts receivable, less allowance for doubtful accounts of $1,557 at December 31, 2016 and $1,639 at June 30, 2016			8,773				9,467
Inventories			160,384				162,323
Prepaid expenses and other current assets			22,110				23,755
Total current assets			248,416				248,204
Property, plant and equipment, net			271,147				273,615
Goodwill and other intangible assets			45,128				45,128
Restricted cash and investments			7,308				7,820
Other assets			2,506				2,642
Total assets		$	574,505			$	577,409
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt		$	2,810			$	3,001
Customer deposits			55,297				60,958
Accounts payable			12,969				15,437
Accrued compensation and benefits			21,184				22,067
Accrued expenses and other current liabilities			19,548				21,884
Total current liabilities			111,808				123,347
Long-term debt			37,533				38,837
Other long-term liabilities			23,680				23,023
Total liabilities			173,021				185,207
Shareholders' equity:
Common stock			490				489
Additional paid-in-capital			377,634				374,972
Less: Treasury stock (at cost)			(628,300	)			(624,932	)
Retained earnings			658,536				646,315
Accumulated other comprehensive income (loss)			(7,057	)			(4,846	)
Total Ethan Allen Interiors Inc. shareholders' equity			401,303				391,998
Noncontrolling interests			181				204
Total shareholders' equity			401,484				392,202
Total liabilities and shareholders' equity		$	574,505			$	577,409

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income (Unaudited)

 (In thousands, except per share data)

  

		Three months ended								Six months ended
		December 31,								December 31,
		2016				2015				2016				2015
Net sales		$	194,672			$	207,535				387,959				397,926
Cost of sales			86,548				91,477				171,368				177,195
Gross profit			108,124				116,058				216,591				220,731
Selling, general and administrative expenses			91,030				89,551				181,160				173,324
Operating income			17,094				26,507				35,431				47,407
Interest and other income (expense)			182				49				325				175
Interest and other related financing costs			324				431				647				887
Income before income taxes			16,952				26,125				35,109				46,695
Income tax expense			6,252				9,591				12,880				17,014
Net income		$	10,700			$	16,534			$	22,229			$	29,681
Per share data:
Basic earnings per common share:
Net income per basic share		$	0.39			$	0.58			$	0.80			$	1.05
Basic weighted average common shares			27,666				28,304				27,696				28,357
Diluted earnings per common share:
Net income per diluted share		$	0.38			$	0.58			$	0.79			$	1.04
Diluted weighted average common shares			27,945				28,537				27,979				28,605
Comprehensive income:
Net income		$	10,700			$	16,534			$	22,229			$	29,681
Other comprehensive income
Currency translation adjustment			(1,281	)			(411	)			(2,211	)			(1,395	)
Other			(11	)			8				(23	)			14
Other comprehensive income (loss) net of tax			(1,292	)			(403	)			(2,234	)			(1,381	)
Comprehensive income		$	9,408			$	16,131			$	19,995			$	28,300

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

 (In thousands)

 

		Six months ended
		December 31,
		2016				2015
Operating activities:
Net income		$	22,229			$	29,681
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			9,999				9,589
Compensation expense related to share-based payment awards			1,582				914
Provision (benefit) for deferred income taxes			371				996
(Gain) loss on disposal of property, plant and equipment			864				(1,249	)
Other			(319	)			(850	)
Change in operating assets and liabilities, net of effects of acquired businesses:
Accounts receivable			694				2,488
Inventories			1,939				(5,582	)
Prepaid and other current assets			639				3,780
Customer deposits			(5,661	)			(8,578	)
Accounts payable			(2,468	)			(2,721	)
Accrued expenses and other current liabilities			(3,724	)			(8,539	)
Other assets and liabilities			1,330				1,110
Net cash provided by operating activities			27,475				21,039
Investing activities:
Proceeds from the disposal of property, plant & equipment			1,258				1,872
Change in restricted cash and investments			512				204
Capital expenditures			(11,254	)			(7,374	)
Sales of marketable securities			-				2,150
Other investing activities			97				93
Net cash provided by (used in) investing activities			(9,387	)			(3,055	)
Financing activities:
Payments on long-term debt and capital lease obligations			(1,745	)			(18,225	)
Purchases and retirements of company stock			(3,368	)			(11,433	)
Payment of cash dividends			(9,460	)			(7,984	)
Other financing activities			1,098				825
Net cash provided by (used in) financing activities			(13,475	)			(36,817	)
Effect of exchange rate changes on cash			(123	)			(318	)
Net increase (decrease) in cash & cash equivalents			4,490				(19,151	)
Cash & cash equivalents at beginning of period			52,659				76,182
Cash & cash equivalents at end of period		$	57,149			$	57,031

 

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity

 Six Months Ended December 31, 2016

(Unaudited)

(In thousands)

 

		Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Income (loss)				Retained Earnings				Non-Controlling Interests				Total
Balance at June 30, 2016		$	489			$	374,972			$	(624,932	)		$	(4,846	)		$	646,315			$	204			$	392,202
Stock issued on share-based awards			1				1,038				-				-				-				-				1,039
Compensation expense associated with share-based awards			-				1,582				-				-				-				-				1,582
Tax benefit associated with exercise of share based awards			-				42				-				-				-				-				42
Purchase/retirement of company stock			-				-				(3,368	)			-				-				-				(3,368	)
Dividends declared on common stock			-				-				-				-				(10,008	)			-				(10,008	)
Comprehensive income			-				-				-				(2,211	)			22,229				(23	)			19,995
Balance at December 31, 2016		$	490			$	377,634			$	(628,300	)		$	(7,057	)		$	658,536			$	181			$	401,484

 

See accompanying notes to consolidated financial statements.

 

 

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.

 

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 definite-lived 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.

 

(2)	Interim Financial Presentation

 

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, 2016 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, 2016.

 

(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 in such domestic and foreign jurisdictions. As of December 31, 2016, the Company and certain subsidiaries are currently under audit in the U.S. from 2009 through 2014. While the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant. 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.

 

The Company’s consolidated effective tax rate was 36.9% and 36.7% for the three and six months ended December 31, 2016 and 36.7% and 36.4% for the three and six months ended December 31, 2015. Both the current and prior year effective tax rates primarily include tax expense on the corresponding taxable year’s net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and recognition of some uncertain tax positions.

 

(4)	Restricted Cash and Investments

 

At December 31, 2016 and June 30, 2016, we held $7.3 million and $7.8 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 insurance and other insurance. 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 11, “Fair Value Measurements".

 

  

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(5)	Inventories

 

Inventories at December 31, 2016 and June 30, 2016 are summarized as follows (in thousands):

 

		December 31,				June 30,
		2016				2016
Finished goods		$	122,693			$	129,627
Work in process			11,287				9,497
Raw materials			28,744				27,554
Valuation allowance			(2,340	)			(4,355	)
Inventories		$	160,384			$	162,323

  

(6)	Borrowings

 

Total debt obligations at December 31, 2016 and June 30, 2016 consist of the following (in thousands):

 

		December 31,				June 30,
		2016				2016
Revolving Credit Facility due 10/21/2019		$	25,000			$	25,000
Term Loan due 10/21/2019			15,000				16,167
Capital leases			1,077				1,560
Total debt obligations			41,077				42,727
Unamortized debt issuance costs			(734	)			(889	)
Total debt			40,343				41,838
Less current maturities			2,810				3,001
Total long-term		$	37,533			$	38,837

  

The Company entered into a five year, $150 million senior secured revolving credit and term loan facility on October 21, 2014, as amended (the “Facility”). The Facility, which expires on October 21, 2019, provides a term loan of up to $35 million and a revolving credit line of up to $115 million, subject to borrowing base availability. We incurred financing costs of $1.5 million under the Facility, which are being amortized by the interest method, over the remaining life of the Facility.

 

At the Company’s option, revolving loans under the Facility bear interest, based on the average availability, at an annual rate of either (a) the London Interbank Offered rate (“LIBOR”) plus 1.5% to 1.75%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.5% to 0.75%. At December 31, 2016 the annual interest rate in effect on the revolving loan was 2.3125%.

 

At the Company’s option, term loans under the Facility bear interest, based on the Company’s rent adjusted leverage ratio, at an annual rate of either (a) LIBOR plus 1.75% to 2.25%, or (b) the higher of (i) the prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) LIBOR plus 1.0% plus in each case 0.75% to 1.25%. At December 31, 2016 the annual interest rate in effect on the term loan was 2.5625%.

 

The Company pays a commitment fee of 0.15% to 0.25% per annum on the unused portion of the Facility, and fees on issued letters of credit at an annual rate of 1.5% to 1.75% based on the average availability. Certain payments are restricted if the availability under the revolving credit line falls below 20% of the total revolving credit line, and the Company is subject to pro forma compliance with the fixed charge coverage ratio if applicable.

 

Quarterly installments of principal on the term loan are payable based on a straight line 15-year amortization period, with the balance due at maturity. The Company does not expect to repay the revolving credit line portion of the Facility within the next year.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

The Facility is secured by all property owned, leased or operated by the Company in the United States and includes certain 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 and share repurchases); sell certain assets; and make investments.

 

The Facility includes a covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.1 to 1.0 at all times unless the outstanding term loans are less than $17.5 million and the fixed charge coverage ratio equals or exceeds 1.25 to 1.0, in which case the fixed charge coverage ratio ceases to apply and thereafter is only triggered if average monthly availability is less than 15% of the amount of the revolving credit line. The Company has met the exemption conditions and is currently exempt from the fixed charge coverage ratio covenant.

 

The Company intends to use the Facility for working capital and general corporate purposes, including dividend payments and share repurchases. At December 31, 2016 and June 30, 2016, there was $0.1 million and $0.2 million respectively, of standby letters of credit outstanding under the Facility. Total availability under the Facility was $89.9 million at December 31, 2016 and $89.8 million at June 30, 2016.

 

At both December 31, 2016 and June 30, 2016, we were in compliance with all of the covenants under the Facility.

 

The following table summarizes, as of December 31, 2016, the timing of cash payments related to our outstanding long-term debt obligations for the remaining six months of fiscal 2017, and each of the five fiscal years subsequent to June 30, 2017, and thereafter (in thousands).

 

Periods ending June 30,
2017		$	1,575
2018			2,838
2019			2,420
2020			34,237
2021			7
2022 and thereafter			-
Total scheduled debt payments		$	41,077

 

(7)	Litigation

 

We are routinely party to various legal proceedings, including investigations or as a defendant in litigation, in the ordinary course of business. We are also subject to various 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. 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.

 

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. In order to reduce the use of hazardous materials in the manufacturing process, we will continue to evaluate the most appropriate, cost-effective control technologies for finishing operations and production methods. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.

 

On a quarterly basis, we review our litigation activities and determine if an unfavorable outcome to us is considered “remote”, “reasonably possible” or “probable” as defined by U.S. GAAP. Where we determine an unfavorable outcome is probable and is reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur with respect to such litigation matters, in the event of a negative outcome, may be in excess of amounts currently accrued, if any; however, we do not expect that the reasonably possible outcome of these litigation matters would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. Where we determine an unfavorable outcome is not probable or reasonably estimable, we do not accrue for any potential litigation loss.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that the likelihood is remote that any existing claims or proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.

 

(8)	Share-Based Compensation

 

All options are issued at the closing stock price on each grant date, and have a contractual term of 10 years. A summary of stock option activity occurring during the six months ended December 31, 2016 is presented below:

 

		Shares
Outstanding as of June 30, 2016			907,073
Activity during the six months ended December 31, 2016
Granted			20,153
Exercised			(51,749	)
Canceled (forfeited/expired)			(13,460	)
Outstanding as of December 31, 2016			862,017
Exerciseable as of December 31, 2016			524,948

 

A summary of stock unit activity occurring during the six months ended December 31, 2016 is presented below.

 

						Weighted
						Average
						Grant Date
		Units				Fair Value
Non-vested units at June 30, 2016			218,050			$	24.53
Granted			81,250				29.92
Vested			-				-
Canceled (forfeited/expired)			-				-
Non-vested units at December 31, 2016			299,300				25.99

 

At December 31, 2016, there were 1,253,264 shares of common stock available for future issuance pursuant to the Stock Incentive Plan.

 

(9)	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,
		2016				2015				2016				2015
Weighted average shares of common stock outstanding for basic calculation			27,666				28,304				27,696				28,357
Effect of dilutive stock options and other share-based awards			279				233				283				248
Weighted average shares of common stock outstanding adjusted for dilution calculation			27,945				28,537				27,979				28,605

  

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

As of December 31, 2016 and 2015, stock options to purchase 464,495 and 667,656 common shares, respectively, were excluded from the respective diluted earnings per share calculations because their impact was anti-dilutive.

 

(10)	Accumulated Other Comprehensive Income

 

Accumulated other comprehensive income consists of foreign currency translation adjustments which are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite time. The table following sets forth the activity in accumulated other comprehensive income (loss) for the period ended December 31, 2016 (in thousands).

 

 

Balance June 30, 2016		$	(4,846	)
Changes before reclassifications		$	(2,211	)
Amounts reclassified from accumulated other comprehensive income		$	-
Current period other comprehensive income (loss)		$	(2,211	)
Balance December 31, 2016		$	(7,057	)

 

(11)	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.

 

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, 2016 and June 30, 2016 (in thousands):

 

December 31, 2016
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	64,457			$	-			$	-			$	64,457
Total		$	64,457			$	-			$	-			$	64,457

  

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

June 30, 2016
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	60,479			$	-			$	-			$	60,479
Total		$	60,479			$	-			$	-			$	60,479

 

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. There were no transfers between level 1 and level 2 during the first six months of fiscal 2017 or fiscal 2016. At December 31, 2016 and June 30, 2016, $7.3 million and $7.8 million, respectively, of the cash equivalents were restricted, and classified as long-term assets.

 

No investments have been in a continuous loss position for more than one year, and no other-than-temporary impairments were recognized. See also Note 4, "Restricted Cash and Investments”.

 

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 period ended December 31, 2016, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a non-recurring basis.

 

(12)	Segment Information

 

Our operations are classified into two operating segments: wholesale and retail. These operating segments represent strategic business areas of our vertically integrated business which, although they operate separately and provide their own distinctive services, enable us to more efficiently control the quality and cost of our complete line of home furnishings and accents.

 

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 accents 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.

 

The retail segment sells home furnishings and accents to consumers through a network of Company operated design centers and online through ethanallen.com. Retail revenue is generated upon the retail sale and delivery of our product to our customers.

 

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 each segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accents and other). The proportion of wholesale segment sales by these product lines for the three and six months ended December 31, 2016 and 2015 is provided as follows:

 

		Three months ended								Six months ended
		December 31,								December 31,
		2016				2015				2016				2015
Case Goods			32	%			33	%			32	%			33	%
Upholstered Products			50	%			50	%			51	%			50	%
Home Accents and Other			18	%			17	%			17	%			17	%
			100	%			100	%			100	%			100	%

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

The proportion of retail segment sales by these product lines for the three and six months ended December 31, 2016 and 2015 is provided as follows:

 

		Three months ended								Six months ended
		December 31,								December 31,
		2016				2015				2016				2015
Case Goods			31	%			30	%			30	%			30	%
Upholstered Products			48	%			48	%			49	%			47	%
Home Accents and Other			21	%			22	%			21	%			23	%
			100	%			100	%			100	%			100	%

 

Segment information for the three and six months ended December 31, 2016 and 2015 is provided below (in thousands):

 

		Three months ended								Six months ended
		December 31,								December 31,
		2016				2015				2016				2015
Net sales:
Wholesale segment		$	113,693			$	126,413			$	228,257			$	246,868
Retail segment			156,292				164,703				308,547			$	310,743
Elimination of inter-company sales			(75,313	)			(83,581	)			(148,845	)			(159,685	)
Consolidated Total		$	194,672			$	207,535			$	387,959			$	397,926
Operating income:
Wholesale segment		$	14,179			$	19,690			$	30,670			$	40,277
Retail segment			2,147				6,689				3,170				8,329
Adjustment of inter-company profit (1)			768				128				1,591				(1,199	)
Consolidated Total		$	17,094			$	26,507			$	35,431			$	47,407
Depreciation & Amortization:
Wholesale segment		$	1,869			$	1,909			$	3,779			$	3,820
Retail segment			3,131				2,897				6,220				5,769
Consolidated Total		$	5,000			$	4,806			$	9,999			$	9,589
Capital expenditures:
Wholesale segment		$	1,944			$	2,340			$	5,583			$	3,856
Retail segment			1,870				1,896				5,671				3,518
Acquisitions			-				-				-				-
Consolidated Total		$	3,814			$	4,236			$	11,254			$	7,374

 

 

		December 31,				June 30,
		2016				2016
Total Assets:
Wholesale segment		$	277,139			$	271,116
Retail segment			328,905				339,942
Inventory profit elimination (2)			(31,539	)			(33,649	)
Consolidated Total		$	574,505			$	577,409

 

(1)	Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.
(2)	Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(13)	Recently Issued Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, Revenue from Contracts with Customers. This ASU provides a framework for revenue recognition that replaces most existing GAAP revenue recognition guidance when it becomes effective. We have an option to use either a retrospective approach or a cumulative effect adjustment approach to implement the guidance. The new standard is effective for us on July 1, 2018, with early adoption permitted. We are currently evaluating the impact of this guidance on our financial statements, and have not yet selected a transition approach. We plan on adopting effective July 1, 2018.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” which states that inventory should be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new guidance is effective for the Company on July 1, 2017. The new guidance should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2017.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which requires the Company to present all deferred tax assets and liabilities as noncurrent. This pronouncement is effective for the Company on July 1, 2017, and early adoption is permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2017.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which is intended to improve financial reporting about leasing transactions. The ASU will require lessees that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Lessors will remain largely unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This pronouncement is effective for the Company on July 1, 2019, and early adoption is permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2019.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Stock Compensation. The objective of this amendment is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This pronouncement is effective for the Company on July 1, 2017, and allows for prospective, retrospective or modified retrospective adoption, depending on the area covered in the update, with early adoption permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2017.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash.  It is intended to reduce diversity in the presentation of restricted cash and restricted cash equivalents in the statement.  The statement requires that restricted cash and restricted cash equivalents be included as components of total cash and cash equivalents as presented on the statement of cash flows. The Company currently does not include restricted cash as a component of cash and equivalents as presented on the statement of cash flows. The new guidance is effective for the Company on July 1, 2018, with early adoption permitted. The Company is currently evaluating the impact on our consolidated financial statements. We plan on adopting effective July 1, 2018.

 

(14)	Subsequent Events

 

None

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of financial condition and results of operations should be read in conjunction with (i) our Consolidated Financial Statements, and notes thereto, included in Item 1 of Part I of this Quarterly Report on Form 10-Q and (ii) our Annual Report on Form 10-K for the year ended June 30, 2016.

 

Forward-Looking Statements

 

Management's discussion and analysis of financial condition and results of operations and other sections of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent our management’s beliefs and assumptions concerning future events based on information currently available to us relating to our future results. Such forward-looking statements are identified in this Quarterly Report on Form 10-Q and in documents incorporated herein by reference by use of forward-looking words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", “will”, “may”, “continue”, “project”, ”target”, “outlook”, “forecast”, “guidance”, and similar expressions and the negatives of such forward-looking words. These forward-looking statements are subject to management decisions and various assumptions about future events, and are not guarantees of future performance. A number of risks and uncertainties could cause actual results to differ materially from those anticipated in the forward-looking statements, including, but not limited to: changes in global or regional political or economic conditions, including changes in governmental and central bank policies; our ability to secure debt or other forms of financing; the effect of operating losses on our ability to pay cash dividends; changes in business conditions in the furniture industry, including changes in consumer spending patterns, tastes and demand for home furnishings; competition from overseas manufacturers and domestic retailers and competitive factors such as changes in products or marketing efforts of others; effects of our brand awareness and marketing programs, including changes in demand for our existing and new products; our ability to locate new design center sites and/or negotiate favorable lease terms for additional design centers or for the expansion of existing design centers; fluctuations in interest rates and the cost, availability and quality of raw materials; pricing pressures; the effects of labor strikes; weather conditions that may affect sales; volatility in fuel, utility, transportation and security costs; the potential effects of natural disasters affecting our suppliers or trading partners; the effects of terrorist attacks or conflicts or wars involving the United States or its allies or trading partners; and those matters discussed in “Item 1A – Risk Factors” of our Annual Report on Form 10-K for the year ended June 30, 2016, and elsewhere in this Quarterly Report on Form 10-Q and our SEC filings. Accordingly, actual circumstances and results could differ materially from those contemplated by the forward-looking statements.

 

Given the risks and uncertainties surrounding forward-looking statements, you should not place undue reliance on these statements. Many of these factors are beyond our ability to control or predict. Our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Other than as required by law, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements are based on the accounting policies used. Certain accounting polices require that estimates and assumptions be made by management for use in the preparation of the financial statements. Critical accounting policies are those that are central to the presentation of the Company’s financial condition and results and that require subjective or complex estimates by management. There have been no material changes with respect to the Company’s critical accounting policies from those disclosed in its 2016 Annual Report on Form 10-K filed with the SEC on August 8, 2016. Also see Note 13, Recently Issued Accounting Pronouncements.

 

Overview

 

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

 

Our business model is to maintain continued focus on (i) communicating our messages with strong advertising and marketing campaigns, (ii) capitalizing on the strength of our interior design professionals and management in our retail design centers, (iii) utilizing ethanallen.com as a key marketing tool to drive traffic to a network of 200 North American design centers located near our demographic base, (iv) investing in new technologies across key aspects of our vertically integrated business, and (v) leveraging the benefits of our vertical integration by maintaining our manufacturing capacity in North America where we manufacture approximately 75% of our products.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Our competitive advantages arise from:

 

●

providing fashionable high quality products of the finest craftsmanship;

 

●

offering complimentary design service through an estimated 2,000 motivated interior design professionals network-wide, which we believe makes us the world’s leading interior design network;

 

●

our wide array of custom product offerings across our upholstery, case goods, and accent product categories;

 

●

enhancing our technology in all aspects of the business; and

 

●

leveraging our vertically integrated structure.

 

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

 

Beginning in the fall of 2014, we commenced a major transformation of our product offerings with several phases. We introduced Casual Classics during the first phase in the fall of 2014. In the spring and summer of 2015, we launched the second phase, Romantic Classics. We launched the third phase in the fall of 2015, during which we further developed Romantic Classics. We further expanded our Casual Classics with three new design projections; Buckhead introduced in June 2016; Santa Monica introduced in July 2016; and Brooklyn introduced in August 2016. These new product offerings were followed by the introduction of our Ethan Allen | Disney home line in November 2016. While we implement major product introductions, such as the introductions described above, our wholesale segment experiences some disruptions in manufacturing as we change tooling and methods, build prototypes and then ramp up production. In our retail segment, some disruption also occurs in our design centers as we update floor displays, and sell the remainder of our older products on clearance to make space for the new product. These disruptions may affect sales and expenses. Our continuous product transformation in measured steps helps us minimize these disruptions and preserve our reputation for offering high-quality and fashionable products.

 

Results of Operations

 

A summary of our consolidated operations is presented in the following tables. In this Item 2 of this quarterly report, unless otherwise noted, all comparisons in the discussion are from the current fiscal quarter or six month year-to-date period ended December 31, 2016 to the comparable prior year fiscal quarter or six month year-to-date period ended December 31, 2015 ($ in millions except per share amounts).

 

		Three months ended December 31,																Six months ended December 31,
		2016				%				2015				%				2016				%				2015				%
Net sales		$	194.7				100.0	%		$	207.5				100.0	%			388.0				100.0	%			397.9				100.0	%
Gross profit			108.1				55.5	%			116.1				55.9	%			216.6				55.8	%			220.7				55.5	%
Selling, general and administrative expenses			91.0				46.8	%			89.6				43.1	%			181.2				46.7	%			173.3				43.6	%
Operating income			17.1				8.8	%			26.5				12.8	%			35.4				9.1	%			47.4				11.9	%
Net income			10.7				5.5	%			16.5				8.0	%			22.2				5.7	%			29.7				7.5	%
Earnings per diluted share		$	0.38							$	0.58							$	0.79							$	1.04
Net cash provided by operating activities		$	-							$	5.0							$	27.5							$	21.0

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

The components of consolidated revenues and operating income (loss) by business segment are as follows (in millions):

 

		Three months ended December 31,								Six months ended December 31,
		2016				2015				2016				2015
Revenue:
Wholesale segment		$	113.7			$	126.4			$	228.3			$	246.9
Retail segment			156.3				164.7				308.5				310.7
Elimination of inter-segment sales			(75.3	)			(83.6	)			(148.8	)			(159.7	)
Consolidated revenue		$	194.7			$	207.5			$	388.0			$	397.9
Operating income :
Wholesale segment		$	14.2			$	19.7			$	30.6			$	40.3
Retail segment			2.1				6.7				3.2				8.3
Adjustment for inter-company profit (1)			0.8				0.1				1.6				(1.2	)
Consolidated operating income		$	17.1			$	26.5			$	35.4			$	47.4

 

(1)

Represents the change in wholesale profit contained in Ethan Allen operated design center inventory existing at the end of the period.

 

We measure the performance of our retail design centers based on net sales and written orders booked on a comparable period to period basis. Comparable design centers are those which have been operating for at least 15 months. Minimal net sales derived from the delivery of customer ordered product are generated during the first three months of operations of newly opened (including relocated) design centers. Design centers acquired by us from independent retailers are included in comparable design center sales in their 13th full month of Ethan Allen-owned operations. The frequency of our promotional events as well as the timing of the end of those events can impact the orders booked during a given quarter. Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to consumers through the Company operated international Design Centers. International net sales as a percent of our consolidated net sales were 8.5% for both the current and prior year quarter. The following tables show selected Design Center location information.

 

		December 31, 2016												December 31, 2015
		Independent retailers				Company- operated				Total				Independent retailers				Company- operated				Total
Retail Design Center location activity:
Balance at beginning of fiscal year			153				143				296				155				144				299
New locations			5				3				8				10				3				13
Closures			(3	)			-				(3	)			(5	)			(5	)			(10	)
Transfers			-				-				-				-				-				-
Balance at end of period			155				146				301				160				142				302
Relocations (in new and closures)			-				-				-				1				1				2
Retail Design Center geographic locations:
United States			49				140				189				55				137				192
International			106				6				112				105				5				110
Total			155				146				301				160				142				302

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Second Quarter Ended December 31, 2016 Compared to Second Quarter Ended December 31, 2015

 

Consolidated net sales for the quarter decreased $12.9 million, or 6.2% to $194.7 million from $207.5 million. Sales, especially for retail, were negatively affected by macroeconomic conditions primarily centered around the election cycle, which created pullback from the consumer, and a more promotional selling environment.

 

Retail net sales for the quarter decreased $8.4 million, or 5.1% to $156.3 million from $164.7 million. Comparative retail net sales decreased 5.4%. Total written business (new orders booked) decreased 3.6% and comparable design center written business in the quarter decreased 4.5%.

 

Wholesale net sales for the quarter decreased $12.7 million, or 10.1% to $113.7 million from $126.4 million. The reduction in sales is primarily a reflection of lower sales by retail, and due to higher promotional discounts.

 

Gross profit was $108.1 million for the quarter, a decrease of $7.9 million, or 6.8%, from $116.1 million, with a decrease in both our retail segment and wholesale segments as a result of lower sales. Consolidated gross margin for the quarter was 55.5% compared to 55.9%. Lower sales and a change in product mix contributed to a decrease in wholesale gross margin. This was partly offset by an increase in retail gross margin, and retail sales as a percent of total consolidated sales of 80.3% for the quarter compared to 79.4% in the prior year quarter.

 

Operating expenses for the quarter increased $1.5 million, or 1.7%, to $91.0 million or 46.8% of net sales, from $89.6 million or 43.1% of net sales. This was primarily due to the prior year quarter $1.3 million gain on the sale of real estate in our retail segment. Compared to the prior year quarter, the current year second quarter also incurred incremental costs associated with the Ethan Allen | Disney launch and from operating more new design centers in the current year quarter than the prior year quarter.

 

Operating income and profit margin was $17.1 million, or 8.8% of net sales for the quarter, a decrease of $9.4 million, or 35.5%, from $26.5 million, or 12.8%.

 

Retail operating income for the quarter decreased $4.5 million to $2.1 million, or 1.4% of sales, compared to $6.7 million, or 4.1% of sales. The lower operating income and margin in the current quarter was driven primarily by the prior year income on the sale of real estate, reduced operating profits from more new stores operating less than 15 months in the current versus the prior year, more discounts and promotions in the current quarter, and expenses associated with the Ethan Allen | Disney new product launch. This was partly offset by an increase in average sale price, and a reduction in clearance sales in the current quarter.

 

Wholesale operating income for the quarter decreased $5.5 million, or 28.0% to $14.2 million, or 12.5% of sales, from $19.7 million, or 15.6% of sales. Decreases were largely due to lower current period sales and product mix.

 

Income tax expense for the quarter totaled $6.3 million compared to $9.6 million. Our effective tax rate was 36.9% in the quarter compared to 36.7%. The effective tax rate for both the second quarter of fiscal 2017 and 2016 primarily includes tax expense on that quarter’s net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and recognition of some uncertain tax positions.

 

Net income for the quarter was $10.7 million compared to $16.5 million, a decrease of 35.3%. This resulted in net income per diluted share for the quarter of $0.38 compared to $0.58, a decrease of 34.5%.

 

Six months Ended December 31, 2016 Compared to Six Months Ended December 31, 2015

 

Consolidated net sales year-to-date decreased $10.0 million, or 2.5% to $388.0 million from $397.9 million, due to lower sales in the second quarter.

 

Retail net sales year-to-date decreased $2.2 million, or 0.7% to $308.5 million from $310.7 million, due to the lower sales in the second quarter.

 

Wholesale net sales year-to-date decreased $18.6 million, or 7.5% to $228.3 million from $246.9 million, due to the lower retail sales.

 

Gross profit was $216.6 million year-to-date, a decrease of $4.1 million, or 1.9%, from $220.7 million, while consolidated gross margin year-to-date increased to 55.8% from 55.5%. Retail sales as a percent of total sales increased to 79.5% from 78.1%, increasing our consolidated gross margin due to mix. An increase in year-to-date average sales per unit also contributed to increased consolidated gross profit, as well as a year-to-date reduction of retail clearance sale activity.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Operating expenses year-to-date increased $7.8 million, or 4.5%, to $181.2 million from $173.3 million. The increase was primarily due to a $0.6 million loss on real estate dispositions in the current period as compared to a $1.3 million gain on real estate dispositions in the prior year period, increased advertising expenses to support our new product launches, occupancy and warehouse costs on a net increase of four design centers and expenses associated with the Ethan Allen | Disney launch.

 

Operating income and profit margin was $35.4 million, or 9.1% of net sales year-to-date, a decrease of $12.0 million, or 25.3%, from $47.4 million, or 11.9%.

 

Retail operating income year-to-date decreased $5.2 million to $3.2 million, or 1.0% of sales, compared to $8.3 million, or 2.7% of sales. The lower operating margin in the six months ended December 31, 2016 was primarily due to a loss on real estate dispositions as compared to a gain in the prior year period, increased advertising expenses to support our new product launches, occupancy and warehouse costs on a net increase of four design centers and expenses associated with the Ethan Allen | Disney launch.

 

Wholesale operating income year-to-date decreased $9.6 million, or 23.9% to $30.7 million, or 13.4% of sales, from $40.3 million, or 16.3% of sales largely due to lower current period sales, and increased advertising expenses.

 

Income tax expense year-to-date totaled $12.9 million compared to $17.0 million, and our effective tax rate was 36.7% compared to 36.4%. The effective tax rate for both the current and prior fiscal year primarily includes tax expense on that fiscal years net income, and tax and interest expense on uncertain tax positions, partially offset by the reversal and recognition of some uncertain tax positions.

 

Net income year-to-date, was $22.2 million compared to $29.7 million, a decrease of 25.1%. This resulted in net income per diluted share of $0.79 year-to-date compared to $1.04 per diluted share, a decrease of 24.0%.

 

Liquidity and Capital Resources

 

At December 31, 2016, we held unrestricted cash and equivalents of $57.1 million and restricted cash and investments of $7.3 million. At June 30, 2016, we held unrestricted cash and cash equivalents of $52.7 million and restricted cash and investments of $7.8 million. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, amounts available under the Facility, and other borrowings.

 

For a detailed discussion of our debt obligations and timing of our related cash payments see Note 6 to the Consolidated Financial Statements included under Item 1 of this Quarterly Report.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

A summary of net cash provided by (used in) operating, investing, and financing activities for the six months ended December 31, 2016 and 2015 is provided below (in millions):

 

		Six months ended
		December 31,
		2016				2015
Cash provided by (used in) operating activities
Net income plus depreciation and amortization		$	32.2			$	39.3
Working capital items			(8.6	)			(19.2	)
Other operating activities			3.9				0.9
Total provided by operating activities		$	27.5			$	21.0
Cash provided by (used in) investing activities
Capital expenditures and acquisitions		$	(11.3	)		$	(7.4	)
Net sales of marketable securities			-				2.1
Other investing activities			1.9				2.2
Total provided by (used in) investing activities		$	(9.4	)		$	(3.1	)
Cash provided by (used in) financing activities
Payments on long-term debt and capital lease obligations		$	(1.7	)		$	(18.2	)
Payment of cash dividends			(9.5	)			(8.0	)
Purchase/retirement of company stock			(3.4	)			(11.4	)
Other financing activities			1.1				0.8
Total provided by (used in) financing activities		$	(13.5	)		$	(36.8	)

 

Cash Provided by (Used in) Operating Activities

 

Year-to-date, cash of $27.5 million was provided by operating activities, an increase of $6.5 million. This was largely due to less cash used in the ordinary course of business for working capital items in fiscal year 2017. The change in other operating activities was primarily due to gains and losses on disposal of property, plant and equipment. These changes in cash provided by operating activities were partially offset by a decrease in net income. Working capital items consist of current assets (accounts receivable, inventories, prepaid and other current assets) less current liabilities (customer deposits, payables, and accrued expenses and other current liabilities).

 

Cash Provided by (Used in) Investing Activities

 

Year-to-date, $9.4 million of cash was used in investing activities, an increase of $6.3 million. The increase was primarily due to an increase in capital expenditures and a decrease in net sales of marketable securities. Current year capital expenditures were primarily for upholstery manufacturing capacity expansion, new retail design centers, and design center improvements related to the Ethan Allen | Disney launch. We anticipate that cash from operations will be sufficient to fund future capital expenditures.

 

Cash Provided by (Used in) Financing Activities

 

Year-to-date, $13.5 million was used in financing activities, which is $23.3 million less cash used than the $36.8 million of cash used during the first six months of fiscal 2016. This was primarily due to a $16.5 million prepayment on the term loan in the prior year as well as a decrease in repurchases of our common stock in the current year. During the current fiscal year to date period we paid dividends of $9.5 million compared to $8.0 million in the prior year to date period, an increase of $1.5 million, paying $0.17 per share in each of the fiscal first and second quarters compared to $0.14 in the comparable prior year periods, an increase of 21.4%. In September 2016, we repurchased 107,700 shares of our common stock for $3.4 million, which settled in October 2016. The Company has continuously paid dividends for every quarter since 1996 and we expect to continue to do so as economic conditions and liquidity permit.

 

We believe that our cash flow from operations, together with our other available sources of liquidity including the Facility and refinancing alternatives, will be adequate to make all required payments of principal and interest on our debt, to permit anticipated capital expenditures, and to fund working capital and other cash requirements. As of December 31, 2016, we had working capital of $136.6 million compared to $124.9 million at June 30, 2016, an increase of $11.8 million, or 9.4%. The Company had a current ratio of 2.22 to 1 at December 31, 2016 and 2.01 to 1 at June 30, 2016.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

In addition to using available cash to fund changes in working capital, capital expenditures, acquisition activity, the repayment of debt, the payment of dividends, and debt repurchases, we have been authorized by our board of directors to repurchase shares of our common stock from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. All of our common stock repurchases and retirements are recorded as treasury stock and result in a reduction of shareholders’ equity. During the six months ending December 31, 2016 we repurchased the following shares of our common stock on a trade date basis:

 

		Six months ended
		December 31,
		2016				2015
Shares of common stock repurchased			107,700				441,329
Cost to repurchase common stock		$	3,367,779			$	12,203,213
Average price per share		$	31.27			$	27.65

 

At December 31, 2016, we had a remaining Board authorization to repurchase 1,650,160 shares of our common stock pursuant to our previously announced share repurchase program.

 

Contractual Obligations

 

There has been no material change to the amount or timing of cash payments related to our outstanding contractual obligations as set forth in Part II, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended June 30, 2016 as filed with the SEC on August 8, 2016.

 

Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations

 

We do not utilize or employ any off-balance sheet arrangements, including special-purpose entities, in operating our business. As such, we do not maintain any (i) retained or contingent interests, (ii) derivative instruments (other than as specified below), or (iii) variable interests which could serve as a source of potential risk to our future liquidity, capital resources and results of operations.

 

We may, from time to time in the ordinary course of business, provide guarantees on behalf of selected affiliated entities or become contractually obligated to perform in accordance with the terms and conditions of certain business agreements. The nature and extent of these guarantees and obligations may vary based on our underlying relationship with the benefiting party and the business purpose for which the guarantee or obligation is being provided. The only such material program was for our consumer credit program described below, which was in place both at December 31, 2016 and June 30, 2016.

 

Ethan Allen Consumer Credit Program

 

The terms and conditions of our consumer credit program, which is financed and administered by a third-party financial institution on a non-recourse basis to Ethan Allen, are set forth in an agreement between the Company and that financial service provider (the “Program Agreement”) which was last amended effective January 2014. Any independent retailer choosing to participate in the consumer credit program is required to enter into a separate agreement with that same third-party financial institution which sets forth the terms and conditions under which the retailer is to perform in connection with its offering of consumer credit to its customers (the “Retailer Agreement”). We have obligated ourselves on behalf of any independent retailer choosing to participate in our consumer credit program by agreeing, in the event of default, breach, or failure of the independent retailer to perform under such Retailer Agreement, to take on certain responsibilities of the independent retailer, including, but not limited to, delivery of goods and reimbursement of customer deposits. Customer receivables originated by independent retailers remain non-recourse to Ethan Allen. The Program Agreement will terminate on July 31, 2019, but includes a provision for automatic one-year renewals unless either party gives notice of termination. While the maximum potential amount of future payments (undiscounted) that we could be required to make under this obligation is indeterminable, recourse provisions exist that would enable us to recover, from the independent retailer, any amount paid or incurred by us related to our performance. Based on the underlying creditworthiness of our independent retailers, including their historical ability to satisfactorily perform in connection with the terms of our consumer credit program, we believe this obligation will expire without requiring funding by us. To ensure funding for delivery of products sold, the terms of the Program Agreement also contain a right for the financial services provider to demand from the Company collateral at a variable rate based on the volume of program sales if the Company does not meet certain covenants. At December 31, 2016 and June 30, 2016, no collateral was required under the Program Agreement.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Product Warranties

 

Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that extend from one to ten years and are provided based on terms that are generally accepted in the industry. All of our domestic independent retailers are required to enter into and perform in accordance with the terms and conditions of a warranty service agreement. We record provisions for estimated warranty and other related costs at time of sale based on historical warranty loss experience and make periodic adjustments to those provisions to reflect actual experience. On rare occasions, certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. In certain cases, a material warranty issue may arise which is beyond the scope of our historical experience. We provide for such warranty issues as they become known and are deemed both probable and estimable. It is reasonably possible that, from time to time, additional warranty and other related claims could arise from disputes or other matters beyond the scope of our historical experience. At both December 31, 2016 and June 30, 2016, our product warranty liability totaled $1.2 million.

 

Business Outlook

 

We continue to strengthen our vertically integrated structure from concept of idea, to engineering, to manufacturing, to retail and logistics. We intend to maintain strong manufacturing capabilities in North America, which we believe is a long-term competitive advantage that will allow us to advance our objectives of maintaining fast order delivery, exceptional quality and improving capacity to ship stocked and custom made-to-order items more quickly, which in turn will allow us to grow our business. In September 2015, the Company announced the planned doubling of its upholstery manufacturing facility in Mexico. The expansion is expected to be completed by the end of calendar 2017.

 

Beginning in fiscal 2014 and through this current quarter, we have completed a major transformation of our product offerings, which refreshed over 70% of our products. Now that we have completed this major transformation in November 2016, we believe that we are well positioned to leverage all the actions we have taken.

 

We expect the home furnishings industry to remain extremely competitive with respect to both the sourcing of products and the wholesale and retail sale of those products for the foreseeable future. Domestic manufacturers continue to face pricing pressures because of the lower manufacturing costs on imports, particularly from Asia. While we also utilize overseas sourcing for approximately one quarter of our products, we choose to differentiate ourselves by maintaining a substantial North American manufacturing base, the majority of which is located in the United States. This structure enables us to leverage our vertically integrated structure to our advantage. We continue to believe that a balanced approach to product sourcing, which includes our own North American manufacturing of about 75% of our product offerings coupled with the import of other selected products, provides the greatest degree of flexibility and shorter lead times and is the most effective approach to ensuring that acceptable levels of quality, service and value are attained.

 

We therefore remain cautiously optimistic about our performance due to the many strong programs already in place and others we currently plan to introduce in the coming months. Our retail strategy involves (i) a continued focus on providing relevant product offerings, a wide array of product solutions, and superior interior design solutions through our large staff of interior design professionals, (ii) continuing strong advertising and marketing campaigns to get our message across and to continue broadening our customer base, (iii) the opening of new or relocated design centers in more prominent locations, and encouraging independent retailers to do the same, (iv) leveraging the use of technology and personal service within our retail network and online through www.ethanallen.com, and (v) further expansion internationally. We believe this strategy provides an opportunity to grow our business.

 

Where You Can Find Other Information

 

Our website is www.ethanallen.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we furnish or file with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to, or exhibits included in, these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. Our SEC filings, including exhibits filed therewith, are also available on the SEC’s website at www.sec.gov. You may obtain and copy any document we furnish or file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks relating to fluctuations in interest rates.

 

Interest rate risk exists primarily through our borrowing activities. We utilize United States dollar denominated borrowings to fund substantially all our working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements and long-term debt is generally used to finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. The extent of this risk is not quantifiable or predictable because of the variability of future interest rates and our future financing requirements.

 

For floating-rate obligations, interest rate changes do not affect the fair value of the underlying financial instrument but would impact future earnings and cash flows, assuming other factors are held constant. Conversely, for fixed-rate obligations, interest rate changes affect the fair value of the underlying financial instrument but would not impact earnings or cash flows. At December 31, 2016, we had $40.0 million of floating-rate debt obligations outstanding under our Facility. We currently do not engage in any interest rate hedging activity and we have no intention of doing so in the foreseeable future. Based on the average interest rate of the loans under the Facility during the quarter ended December 31, 2016, and to the extent that borrowings were outstanding, a 10% change in the interest rate would not have a material effect on our consolidated results of operations and financial condition. For information regarding the Company’s other risk factors, see Item 7A – Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the year ended June 30, 2016 as filed with the SEC on August 8, 2016.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including the Chairman of the Board and Chief Executive Officer ("CEO") and the Executive Vice President Administration and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the CEO and CFO have concluded that, as of December 31, 2016, our disclosure controls and procedures were effective in ensuring that material information relating to us (including our consolidated subsidiaries), which is required to be disclosed by us in our periodic reports filed with or submitted to the SEC is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

There have been no material changes to the matters discussed in Part I, Item 3 - Legal Proceedings in our Annual Report on Form 10-K for the year ended June 30, 2016 as filed with the SEC on August 8, 2016. See Note 7 of the Notes to Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of our legal proceedings.

 

Item 1A. Risk Factors

 

There have been no material changes to the matters discussed in “Item IA – Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2016 as filed with the SEC on August 8, 2016.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Purchases of Equity Securities

 

Certain information regarding purchases made by or on behalf of us or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of our common stock during the three months ended December 31, 2016 on a trade date basis is provided below:

 

On November 21, 2002, our Board of Directors approved a share repurchase program authorizing us to repurchase up to 2,000,000 shares of our common stock, from time to time, either directly or through agents, in the open market at prices and on terms satisfactory to us. The Board of Directors subsequently increased the aggregate authorization under the repurchase program on several occasions, the last of which was on April 13, 2015 when the aggregate authorization was increased to approximately 3,000,000 shares. There is no expiration date on the repurchase authorization and the amount and timing of future share repurchases, if any, will be determined as market and business conditions warrant. There were no repurchases effected by the Company during the quarter ended December 31, 2016. The maximum number of shares that may yet be purchased under our publicly announced repurchase program is 1,650,160 shares.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

  

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES 

 

Item 6. Exhibits

 

 

 

Exhibit Number	Description
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

 

 

* - Furnished herewith.

  

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	ETHAN ALLEN INTERIORS INC.
	(Registrant)
Date: January 26, 2017	BY:/s/ M. Farooq Kathwari
	M. Farooq Kathwari
	Chairman, President and Chief Executive Officer
	(Principal Executive Officer)

 

 

Date: January 26, 2017	BY:/s/ Corey Whitely
	Corey Whitely
	Executive Vice President Administration Chief Financial Officer and Treasurer
	(Principal Financial Officer)

 

 

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