UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2014

 

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 October 23, 2014, there were 28,927,385 shares of Class A 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	19
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4. Controls and Procedures	27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	27
Item 1A. Risk Factors	27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3. Defaults Upon Senior Securities	27
Item 4. Mine Safety Disclosures	27
Item 5. Other Information	27
Item 6. Exhibits	28
SIGNATURES	29

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Balance Sheets

(In thousands)

 

		September 30, 2014				June 30, 2014
ASSETS
Current assets:
Cash and cash equivalents		$	114,308			$	109,176
Marketable securities			12,878				18,153
Accounts receivable, less allowance for doubtful accounts of $1,438 at September 30, 2014 and $1,442 at June 30, 2014			14,651				12,426
Inventories			157,519				146,275
Prepaid expenses and other current assets			24,444				19,599
Total current assets			323,800				305,629
Property, plant and equipment, net			285,877				288,156
Goodwill and other intangible assets			45,128				45,128
Restricted cash and investments			8,007				8,507
Other assets			7,367				7,014
Total assets		$	670,179			$	654,434
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt		$	560			$	501
Customer deposits			66,027				59,684
Accounts payable			20,051				24,320
Accrued compensation and benefits			23,901				27,709
Accrued expenses and other current liabilities			34,037				23,833
Total current liabilities			144,576				136,047
Long-term debt			130,576				130,411
Other long-term liabilities			19,812				20,509
Total liabilities			294,964				286,967
Shareholders' equity:
Class A common stock			486				486
Additional paid-in-capital			365,928				365,733
Less: Treasury stock (at cost)			(584,041	)			(584,041	)
Retained earnings			592,787				584,395
Accumulated other comprehensive income			(209	)			642
Total Ethan Allen Interiors Inc. shareholders' equity			374,951				367,215
Noncontrolling interests			264				252
Total shareholders' equity			375,215				367,467
Total liabilities and shareholders' equity		$	670,179			$	654,434

 

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
		September 30,
		2014				2013
Net sales		$	190,706			$	181,659
Cost of sales			85,903				82,916
Gross profit			104,803				98,743
Selling, general and administrative expenses			84,333				82,799
Operating income			20,470				15,944
Interest and other income			143				82
Interest and other related financing costs			1,889				1,873
Income before income taxes			18,724				14,153
Income tax expense			6,845				5,119
Net income		$	11,879			$	9,034
Per share data:
Basic earnings per common share:
Net income per basic share		$	0.41			$	0.31
Basic weighted average common shares			28,927				28,911
Diluted earnings per common share:
Net income per diluted share		$	0.41			$	0.31
Diluted weighted average common shares			29,248				29,288
Comprehensive income:
Net income		$	11,879			$	9,034
Other comprehensive income
Currency translation adjustment			(855	)			55
Other			16				18
Other comprehensive income net of tax			(839	)			73
Comprehensive income		$	11,040			$	9,107

  

See accompanying notes to consolidated financial statements.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Three months ended September 30,
		2014				2013
Operating activities:
Net income		$	11,879			$	9,034
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			4,719				4,289
Compensation expense related to share-based payment awards			317				373
Provision (benefit) for deferred income taxes			124				57
Loss on disposal of property, plant and equipment			1,920				369
Other			(37	)			246
Change in operating assets and liabilities, net of  effects of acquired businesses:
Accounts receivable			(2,663	)			(272	)
Inventories			(10,639	)			(4,408	)
Prepaid and other current assets			(4,546	)			60
Customer deposits			5,574				8,303
Accounts payable			(4,269	)			2,788
Accrued expenses and other current liabilities			5,687				429
Other assets and liabilities			(1,258	)			(123	)
Net cash provided by operating activities			6,808				21,145
Investing activities:
Proceeds from the disposal of property, plant & equipment			3,305				770
Change in restricted cash and investments			500				499
Capital expenditures			(5,410	)			(3,305	)
Acquisitions			(1,991	)			-
Purchases of marketable securities			-				(3,990	)
Sales of marketable securities			5,075				5,920
Other investing activities			44				83
Net cash used in investing activities			1,523				(23	)
Financing activities:
Payments on long-term debt and capital lease obligations			(150	)			(118	)
Payment of cash dividends			(2,900	)			(2,605	)
Other financing activities			4				140
Net cash used in financing activities			(3,046	)			(2,583	)
Effect of exchange rate changes on cash			(153	)			84
Net increase (decrease) in cash & cash equivalents			5,132				18,623
Cash & cash equivalents at beginning of period			109,176				72,601
Cash & cash equivalents at end of period		$	114,308			$	91,224

 

See accompanying notes to consolidated financial statements.

 

  

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

Consolidated Statements of Shareholders’ Equity

Three Months Ended September 30, 2014

(Unaudited)

(In thousands)

 

														Accumulated
						Additional								Other								Non-
		Common				Paid-in				Treasury				Comprehensive				Retained				Controlling
		Stock				Capital				Stock				Income				Earnings				Interests				Total
Balance at June 30, 2014		$	486			$	365,733			$	(584,041	)		$	642			$	584,395			$	252			$	367,467
Compensation expense associated with share-based awards			-				317				-				-				-				-				317
Tax benefit associated with exercise of share based awards			-				(122	)			-				-				-				-				(122	)
Dividends declared on common stock			-				-				-				-				(3,487	)			-				(3,487	)
Comprehensive income			-				-				-				(851	)			11,879				12				11,040
Balance at September 30, 2014		$	486			$	365,928			$	(584,041	)		$	(209	)		$	592,787			$	264			$	375,215

 

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. 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 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.

 

Our consolidated financial statements include the accounts of an entity in which 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 entity are immaterial and included in the Consolidated Statement of Comprehensive Income within interest and other income, net.

 

(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 months ended September 30, 2014 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, 2014.

 

(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 September 30, 2014, the Company and certain subsidiaries are currently under audit in the U.S. from 2006 through 2012. 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 36.6% for the three months ended September 30, 2014, and 36.2% for the three months ended September 30, 2013, respectively. The current year effective tax rate primarily includes tax expense on the current year net income, and tax and interest expense on uncertain tax positions. The prior year effective tax rate primarily includes the tax expense on that year’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain retail segment deferred tax assets, partly offset by the reversal and recognition of some uncertain tax positions.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(4)    Restricted Cash and Investments

 

At September 30, 2014 and June 30, 2014, we held $8.0 million and $8.5 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 12, “Fair Value Measurements".

 

(5)    Marketable Securities

 

At September 30, 2014 and June 30, 2014, the Company held marketable securities of $12.9 million and $18.2 million respectively, classified as current assets, consisting of U.S. municipal and corporate bonds with maturities ranging from less than one year to less than two years, which were rated A/A2 or better by the rating services Standard & Poors (“S&P”) and Moodys Investors Service (“Moodys”) respectively. There were no material realized or unrealized gains or losses for the three months ended September 30, 2014 and September 30, 2013. We do not believe there are any impairments considered to be other than temporary at September 30, 2014. See also Note 12, “Fair Value Measurements".

 

(6)    Inventories

 

Inventories at September 30, 2014 and June 30, 2014 are summarized as follows (in thousands):

 

		September 30,				June 30,
		2014				2014
Finished goods		$	121,956			$	116,377
Work in process			11,488				8,355
Raw materials			26,879				24,347
Valuation allowance			(2,804	)			(2,804	)
		$	157,519			$	146,275

 

(7)    Borrowings

 

Total debt obligations at September 30, 2014 and June 30, 2014 consist of the following (in thousands):

 

		September 30,				June 30,
		2014				2014
5.375% Senior Notes due 2015		$	129,281			$	129,255
Capital leases and other			1,855				1,657
Total debt			131,136				130,912
Less current maturities			560				501
Total long-term debt		$	130,576			$	130,411

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

In September 2005, we issued $200.0 million in ten-year senior unsecured notes due October 1, 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We 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. In fiscal years 2011 through 2013, the Company repurchased an aggregate $70.6 million of the Senior Notes in several unsolicited transactions.

 

We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). We have not had any revolving loans under the Facility at any time. At both September 30, 2014 and June 30, 2014, there was $0.6 million of standby 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 $49.4 million at both September 30, 2014 and June 30, 2014 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.

 

At both September 30, 2014 and June 30, 2014, we were in compliance with all covenants of the Senior Notes and the Facility.

 

(8)    Litigation

 

We are routinely involved in various 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. 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. 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.

 

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 will have a material adverse effect on our financial position, results of operations or cash flows.

 

(9)    Share-Based Compensation

 

During the three months ended September 30, 2014, the Company awarded options to purchase 26,316 shares of our common stock. Awarded options had an exercise price per share of $22.80, a grant date fair value of $10.44 and vest over three years. During the three months ended September 30, 2014, options covering 209,950 shares of common stock were cancelled, primarily due to the expiration of their 10 year terms. At September 30, 2014, there are 1,544,512 shares of common stock available for future issuance pursuant to the 1992 Stock Option Plan.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(10)  Earnings Per Share

 

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

 

		Three months ended
		September 30,
		2014				2013
Weighted average common shares outstanding for basic calculation			28,927				28,911
Effect of dilutive stock options and other share-based awards			321				377
Weighted average common shares outstanding adjusted for dilution calculation			29,248				29,288

 

As of September 30, 2014 and 2013, stock options to purchase 541,508 and 489,549 common shares, respectively, were excluded from the respective diluted earnings per share calculations because their impact was anti-dilutive.

 

(11)  Accumulated Other Comprehensive Income

 

The following table sets forth the activity in accumulated other comprehensive income for the year to date period ended September 30, 2014 (in thousands):

 

				Foreign								Unrealized
				currency								gains and
				translation				Derivative				losses on
				adjustments				instruments				investments				Total
Balance June 30, 2014				$	670			$	(39	)		$	11			$	642
	Changes before reclassifications			$	(855	)		$	-			$	(4	)		$	(859	)
	Amounts reclassified from accumulated other comprehensive income			$	-			$	8			$	-			$	8
Current period other comprehensive income				$	(855	)		$	8			$	(4	)		$	(851	)
Balance September 30, 2014				$	(185	)		$	(31	)		$	7			$	(209	)

 

Foreign currency translation adjustments 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 derivative instruments are reclassified to interest expense in our consolidated statements of operations.

 

(12)  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:

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

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 September 30, 2014 and June 30, 2014 (in thousands):

 

September 30, 2014
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	122,315			$	-			$	-			$	122,315
Available-for-sale securities			-				12,878				-				12,878
Total		$	122,315			$	12,878			$	-			$	135,193

  

 

June 30, 2014
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	117,683			$	-			$	-			$	117,683
Available-for-sale securities			-				18,153				-				18,153
Total		$	117,683			$	18,153			$	-			$	135,836

 

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 three months of fiscal 2015 or fiscal 2014. At September 30, 2014 and June 30, 2014, $8.0 million and $8.5 million respectively, of the cash equivalents were restricted, and classified as long-term assets.

 

At September 30, 2014, available-for-sale securities consist of $12.9 million in U.S. municipal bonds, and at June 30, 2014, available-for-sale securities consisted of $18.2 million in U.S. municipal bonds, all with maturities of less than two years. The bonds are rated A/A2 or better by S&P and Moodys respectively. As of September 30, 2014 and June 30, 2014, there were no material gross unrealized gains or losses on available-for-sale securities.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

As of September 30, 2014 and June 30, 2014, the contractual maturities of our available-for-sale securities were as follows:

  

September 30, 2014
		Cost				Estimated Fair Value
Due in one year or less		$	13,119			$	12,878
Due after one year through five years		$	-			$	-

 

June 30, 2014
		Cost				Estimated Fair Value
Due in one year or less		$	16,049			$	15,863
Due after one year through five years		$	2,296			$	2,290

 

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" 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 impaired. During the three months ended September 30, 2014 and 2013, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.

 

(13)  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. 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 the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accents 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 months ended September 30, 2014 and 2013 is provided as follows:

 

		Three months ended
		September 30,
		2014				2013
Case Goods			36	%			35	%
Upholstered Products			46	%			47	%
Home Accents and Other			18	%			18	%
			100	%			100	%

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Segment information for the three months ended September 30, 2014 and 2013 is provided below (in thousands):

 

		Three months ended
		September 30,
		2014				2013
Net sales:
Wholesale segment		$	124,600			$	113,198
Retail segment			145,043				141,827
Elimination of inter-company sales			(78,937	)			(73,366	)
Consolidated Total		$	190,706			$	181,659
Operating income:
Wholesale segment		$	21,542			$	16,132
Retail segment			1,762				(204	)
Adjustment of inter-company profit (1)			(2,834	)			16
Consolidated Total		$	20,470			$	15,944
Depreciation & Amortization:
Wholesale segment		$	2,094			$	1,891
Retail segment			2,625				2,398
Consolidated Total		$	4,719			$	4,289
Capital expenditures:
Wholesale segment		$	3,961			$	1,474
Retail segment			1,449				1,831
Acquisitions			1,991				-
Consolidated Total		$	7,401			$	3,305

 

 

		September 30,				June 30,
		2014				2014
Total Assets:
Wholesale segment		$	343,085			$	339,271
Retail segment			358,697				344,025
Inventory profit elimination (2)			(31,603	)			(28,862	)
Consolidated Total		$	670,179			$	654,434

 

 

(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)

 

(14)  Recently Issued Accounting Pronouncements

 

There have been no recently issued accounting pronouncements during the three months ended September 30, 2014 that are expected to have a material effect on the Company’s financial statements.

 

(15)  Financial Information About the Parent, the Issuer and the Guarantors

 

On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly owned 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 September 30, 2014 and June 30, 2014, the condensed consolidating statements of operations for the three months ended September 30, 2014 and 2013, and the condensed consolidating statements of cash flows for the three months ended September 30, 2014 and 2013 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited) 

 

CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

September 30, 2014

 

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	-			$	102,897			$	7,517			$	3,894			$	-			$	114,308
Marketable securities			-				12,878				-				-				-				12,878
Accounts receivable, net			-				14,347				304				-				-				14,651
Inventories			-				-				183,490				5,632				(31,603	)			157,519
Prepaid expenses and other current assets			-				8,407				14,087				1,950				-				24,444
Intercompany receivables			-				846,615				325,820				(3,331	)			(1,169,104	)			-
Total current assets			-				985,144				531,218				8,145				(1,200,707	)			323,800
Property, plant and equipment, net			-				8,670				260,863				16,344				-				285,877
Goodwill and other intangible assets			-				37,905				7,223				-				-				45,128
Restricted cash and investments			-				8,007				-				-				-				8,007
Other assets			-				4,990				1,705				672				-				7,367
Investment in affiliated companies			742,283				(105,855	)			-				-				(636,428	)			-
Total assets		$	742,283			$	938,861			$	801,009			$	25,161			$	(1,837,135	)		$	670,179
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt		$	-			$	-			$	560			$	-			$	-			$	560
Customer deposits			-				-				62,888				3,139				-				66,027
Accounts payable			-				3,805				16,006				240				-				20,051
Accrued expenses and other current liabilities			3,604				36,962				15,591				1,781				-				57,938
Intercompany payables			363,464				(8,804	)			783,438				31,006				(1,169,104	)			-
Total current liabilities			367,068				31,963				878,483				36,166				(1,169,104	)			144,576
Long-term debt			-				129,281				1,295				-				-				130,576
Other long-term liabilities			-				3,152				16,185				475				-				19,812
Total liabilities			367,068				164,396				895,963				36,641				(1,169,104	)			294,964
Shareholders’ equity			375,215				774,465				(94,954	)			(11,480	)			(668,031	)			375,215
Total liabilities and shareholders’ equity		$	742,283			$	938,861			$	801,009			$	25,161			$	(1,837,135	)		$	670,179

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

June 30, 2014

 

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	-			$	95,567			$	10,347			$	3,262			$	-			$	109,176
Marketable securities			-				18,153				-				-				-				18,153
Accounts receivable, net			-				12,118				308				-				-				12,426
Inventories			-				-				168,996				6,141				(28,862	)			146,275
Prepaid expenses and other current assets			-				6,954				10,800				1,845				-				19,599
Intercompany receivables			-				836,086				322,382				(3,478	)			(1,154,990	)			-
Total current assets			-				968,878				512,833				7,770				(1,183,852	)			305,629
Property, plant and equipment, net			-				8,848				262,272				17,036				-				288,156
Goodwill and other intangible assets			-				37,905				7,223				-				-				45,128
Restricted cash and investments			-				8,507				-				-				-				8,507
Other assets			-				4,620				1,647				747				-				7,014
Investment in affiliated companies			731,003				(107,050	)			-				-				(623,953	)			-
Total assets		$	731,003			$	921,708			$	783,975			$	25,553			$	(1,807,805	)		$	654,434
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt		$	-			$	-			$	501			$	-			$	-			$	501
Customer deposits			-				-				55,810				3,874				-				59,684
Accounts payable			-				6,423				17,699				198				-				24,320
Accrued expenses and other current liabilities			3,013				30,656				16,292				1,581				-				51,542
Intercompany payables			360,523				(8,468	)			773,850				29,085				(1,154,990	)			-
Total current liabilities			363,536				28,611				864,152				34,738				(1,154,990	)			136,047
Long-term debt			-				129,255				1,156				-				-				130,411
Other long-term liabilities			-				4,241				15,763				505				-				20,509
Total liabilities			363,536				162,107				881,071				35,243				(1,154,990	)			286,967
Shareholders’ equity			367,467				759,601				(97,096	)			(9,690	)			(652,815	)			367,467
Total liabilities and shareholders’ equity		$	731,003			$	921,708			$	783,975			$	25,553			$	(1,807,805	)		$	654,434

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

(In thousands)

Three months ended September 30, 2014

 

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Net sales		$	-			$	122,465			$	200,493			$	12,156			$	(144,408	)		$	190,706
Cost of sales			-				90,984				128,634				7,952				(141,667	)			85,903
Gross profit			-				31,481				71,859				4,204				(2,741	)			104,803
Selling, general and administrative expenses			45				10,741				68,466				5,081				-				84,333
Operating income (loss)			(45	)			20,740				3,393				(877	)			(2,741	)			20,470
Interest and other income (expense)			11,924				1,315				(1	)			24				(13,119	)			143
Interest and other related financing costs			-				1,859				30				-				-				1,889
Income (loss) before income taxes			11,879				20,196				3,362				(853	)			(15,860	)			18,724
Income tax expense			-				5,531				1,232				82				-				6,845
Net income/(loss)		$	11,879			$	14,665			$	2,130			$	(935	)		$	(15,860	)		$	11,879

 

 

Three months ended September 30, 2013

 

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Net sales		$	-			$	111,523			$	194,828			$	10,439			$	(135,131	)		$	181,659
Cost of sales			-				83,933				127,155				6,857				(135,029	)			82,916
Gross profit			-				27,590				67,673				3,582				(102	)			98,743
Selling, general and administrative expenses			45				9,632				68,165				4,957				-				82,799
Operating income (loss)			(45	)			17,958				(492	)			(1,375	)			(102	)			15,944
Interest and other income (expense)			9,079				(1,868	)			-				(16	)			(7,113	)			82
Interest and other related financing costs			-				1,851				22				-				-				1,873
Income (loss) before income taxes			9,034				14,239				(514	)			(1,391	)			(7,215	)			14,153
Income tax expense			-				5,058				38				23				-				5,119
Net income/(loss)		$	9,034			$	9,181			$	(552	)		$	(1,414	)		$	(7,215	)		$	9,034

 

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

 

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

(In thousands)

Three months ended September 30, 2014

 

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Net cash provided by (used in) operating activities		$	2,900			$	1,030			$	1,892			$	986			$	-			$	6,808
Cash flows from investing activities:
Capital expenditures			-				(276	)			(4,933	)			(201	)			-				(5,410	)
Acquisitions			-				-				(1,991	)			-				-				(1,991	)
Proceeds from the disposal of property, plant and equipment			-				953				2,352				-				-				3,305
Change in restricted cash and investments			-				500				-				-				-				500
Sales of marketable securities			-				5,075								-				-				5,075
Other			-				44				-				-				-				44
Net cash provided by (used in) investing activities			-				6,296				(4,572	)			(201	)			-				1,523
Cash flows from financing activities:	<