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 March 3l, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 1-11692
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Ethan Allen Interiors Inc.
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(Exact name of registrant as specified in its charter)
Delaware 06-1275288
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
Ethan Allen Drive, Danbury, Connecticut 06811
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(Address of principal executive offices)
(203) 743-8000
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(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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
38,737,509 at March 31, 2002
ETHAN ALLEN INTERIORS INC.
AND SUBSIDIARY
INDEX
PAGE
Part I. Financial Information:
Item 1. Consolidated Financial Statements as of
March 31, 2002 (unaudited) and
June 30, 2001 and for the three and
nine months ended March 31, 2002
and 2001 (unaudited)
Consolidated Balance Sheets 2
Consolidated Statements of Operations 3
Consolidated Statements of Cash Flows 4
Consolidated Statements of Shareholders'
Equity 5
Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 16
Part II. Other Information: 17
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 18
-1-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
March 31,
2002 June 30,
(unaudited) 2001
----------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 62,260 $ 48,112
Accounts receivable, less allowances of $2,547
and $2,679 at March 31, 2002 and
June 30, 2001, respectively 33,668 33,055
Inventories 167,207 176,036
Prepaid expenses and other current assets 19,601 18,085
Deferred income taxes 13,054 14,789
--------- ---------
Total current assets 295,790 290,077
Property, plant and equipment, net 293,741 268,659
Intangibles, net 71,610 52,863
Other assets 6,777 7,519
--------- ---------
Total assets $ 667,918 $ 619,118
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long term debt $ 110 $ 131
Accounts payable 77,840 63,788
Accrued compensation and benefits 28,320 27,766
Accrued expenses 14,936 16,169
--------- ---------
Total current liabilities 121,206 107,854
Long-term debt 9,239 9,356
Other long-term liabilities 2,091 2,712
Deferred income taxes 33,118 34,413
-------- ---------
Total liabilities 165,654 154,335
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000
shares authorized, 45,231,942 and 45,138,046
shares issued at March 31, 2002 and
June 30, 2001, respectively 452 451
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at March 31, 2002 and June 30, 2001 - -
Additional paid-in capital 276,917 274,645
--------- ---------
277,369 275,096
Less: Treasury stock (at cost), 6,494,435 shares
at March 31, 2002 and 5,735,284 shares at
June 30, 2001 (150,619) (129,562)
Retained earnings 375,514 319,249
--------- ----------
Total shareholders' equity 502,264 464,783
--------- ----------
Total liabilities and shareholders' equity $ 667,918 $ 619,118
========= =========
See accompanying notes to consolidated financial statements.
-2-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Operations
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Nine Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales $ 227,917 $ 233,791 $ 657,499 $ 677,689
Cost of sales 119,481 130,280 351,714 366,732
--------- --------- ---------- ---------
Gross profit 108,436 103,511 305,785 310,957
Operating expenses:
Selling 41,461 41,550 120,185 120,933
General and administrative 30,973 30,768 89,857 88,658
--------- --------- --------- ---------
Total operating expenses 72,434 72,318 210,042 209,591
--------- --------- --------- ---------
Operating income 36,002 31,193 95,743 101,366
Interest and other miscellaneous income, net 1,063 1,188 2,621 1,829
Interest and other related financing costs 137 178 462 563
--------- --------- --------- ---------
Income before income taxes 36,928 32,203 97,902 102,632
Income tax expense 13,959 12,173 37,007 38,795
--------- --------- --------- ---------
Net income $ 22,969 $ 20,030 $ 60,895 $ 63,837
========= ========= ========= =========
PER SHARE DATA:
Basic earnings per common share:
Net income per basic share $ 0.59 $ 0.51 $ 1.57 $ 1.62
========= ========= ========= =========
Basic weighted average common
shares outstanding 38,734 39,397 38,711 39,386
Diluted earnings per common share:
Net income per diluted share $ 0.58 $ 0.50 $ 1.52 $ 1.59
========= ========= ========= =========
Diluted weighted average common
shares outstanding 39,898 40,442 39,983 40,267
See accompanying notes to consolidated financial statements.
-3-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Nine Months
Ended March 31,
2002 2001
--------- --------
Operating activities:
Net income $ 60,895 $ 63,837
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,271 14,710
Compensation (income) expense related to
restricted stock award (40) 324
Provision (benefit) for deferred income taxes 440 (1,470)
Other non-cash (income) expense (1,069) (1,621)
Change in assets and liabilities, net of
the effects from acquired and divested
businesses:
Accounts receivable (3,213) (2,936)
Inventories 21,675 (11,814)
Prepaid and other current assets 532 (4,441)
Other assets (292) (1,576)
Accounts payable 2,203 11,332
Income taxes payable 4,758 (21)
Accrued expenses (1,044) 3,664
Other liabilities (621) 438
---------- ---------
Net cash provided by operating activities 98,495 70,426
---------- ---------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 4,694 6,965
Capital expenditures (22,289) (31,449)
Acquisitions (42,386) (9,722)
Other 103 329
---------- ---------
Net cash used in investing activities (59,878) (33,877)
---------- ---------
Financing activities:
Borrowings on revolving credit facilities - 1,500
Payments on revolving credit facilities - (9,500)
Other payments on long-term debt and
capital leases (138) (287)
Net proceeds from issuance of common stock 1,383 603
Dividends paid (4,657) (4,707)
Payments to acquire treasury stock (21,057) (625)
---------- ---------
Net cash used in financing activities (24,469) (13,016)
---------- ---------
Net increase in cash and cash equivalents 14,148 23,533
Cash and cash equivalents at beginning of period 48,112 14,024
---------- ---------
Cash and cash equivalents at end of period $ 62,260 $ 37,557
========= ========
See accompanying notes to consolidated financial statements.
-4-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Nine Months Ended March 31, 2002
(Unaudited)
(Dollars in thousands)
Additional
Common Paid-in Treasury Retained
Stock Capital Stock Earnings Total
------- ----------- ---------- --------- --------
Balance at June 30, 2001 $ 451 $274,645 $(129,562) $319,249 $464,783
Issuance of 93,896 shares
of common stock upon the
exercise of stock options 1 1,342 - - 1,343
Purchase of 759,151 shares
of treasury stock - - (21,057) - (21,057)
Tax benefit associated with the
exercise of employee stock
options - 843 - - 843
Charge for early vesting of
stock options - 87 - - 87
Dividends declared on common
stock - - - (4,630) (4,630)
Net income - - - 60,895 60,895
----- -------- ---------- --------- ---------
Balance at March 31, 2002 $ 452 $276,917 $(150,619) $375,514 $502,264
====== ======== ========= ========= =========
See accompanying notes to consolidated financial statements.
-5-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
Ethan Allen Interiors Inc. (the "Company") is a Delaware corporation
incorporated on May 25, 1989. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary Ethan
Allen Inc. ("Ethan Allen") and Ethan Allen's subsidiaries. All of Ethan
Allen's capital stock is owned by the Company. The Company has no other
assets or operating results other than those associated with its
investment in Ethan Allen.
(2) Interim Financial Presentation
All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements. In the opinion of the
Company, all adjustments, consisting only of normal recurring accruals
necessary for fair presentation, have been included in the financial
statements. The results of operations for the three and nine months ended
March 31, 2002, are not necessarily indicative of results for the fiscal
year. It is suggested that the interim consolidated financial statements
are read in conjunction with the consolidated financial statements and
notes included in the Company's Annual Report on Form 10-K for the year
ended June 30, 2001.
Certain reclassifications have been made to prior year financial
information in order to conform to the current year's presentation. These
changes were made for disclosure purposes only and did not have an impact
on previously reported results of operations or shareholders' equity.
(3) Inventories
Inventories at March 31, 2002 and June 30, 2001 are summarized as follows
(dollars in thousands):
March 31, June 30,
2002 2001
-------- --------
Finished goods $113,699 $115,661
Work in process 16,116 19,521
Raw materials 37,392 40,854
-------- --------
$167,207 $176,036
======== ========
(4) Goodwill and Other Intangible Assets
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". Upon evaluation of the Company's intangible assets, it
was determined that product technology of $18.2 million recorded as an
intangible asset was not a separate legal asset apart from goodwill and
was reclassed to goodwill during the three months ended March 31, 2002.
Including this adjustment, the Company had goodwill (net of accumulated
amortization) of $51.9 million and intangible assets (net of accumulated
amortization) of $19.7 million as of March 31, 2002. Goodwill in the
wholesale and retail segments was $27.5 million and $24.4 million,
respectively. The wholesale segment includes intangible assets of $19.7
million consisting of Ethan Allen trade names, which were formerly being
amortized over 40 years. The Company has re-assessed the useful lives of
goodwill and intangible assets and both were deemed to have indefinite
useful lives. Amortization of these assets ceased on July 1, 2001. No
impairment losses were recorded on these intangible assets due to the
adoption.
-6-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(4) Goodwill and Other Intangible Assets (continued)
The following table reconciles the Company's reported net income and
earnings per share with pro forma balances from previous periods adjusted
to exclude goodwill amortization, which is no longer recorded under SFAS
No. 142. The current quarter's net income and earnings per share are
presented for comparative purposes only.
Three Months Nine Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
--------- -------- -------- --------
Net Income:
Reported net income $22,969 $20,030 $60,895 $63,837
Add back: Goodwill amortization
after-tax - 173 - 519
Add back: Intangible asset
amortization after-tax - 110 - 329
------- ------- ------- -------
Adjusted net income $22,969 $20,313 $60,895 $64,685
======= ======= ======= =======
Basic Earnings per Share:
Reported earnings per share $ 0.59 $ 0.51 $ 1.57 $ 1.62
Goodwill amortization - 0.01 - 0.01
Intangible asset amortization - - - 0.01
------- ------- ------- -------
Adjusted earnings per share $ 0.59 $ 0.52 $ 1.57 $ 1.64
======= ======= ======= =======
Diluted Earnings per Share:
Reported earnings per share $ 0.58 $ 0.50 $ 1.52 $ 1.59
Goodwill amortization - - - 0.01
Intangible asset amortization - - - 0.01
------- ------- ------- -------
Adjusted earnings per share $ 0.58 $ 0.50 $ 1.52 $ 1.61
======= ======= ======= =======
(5) Restructuring and Impairment Charge
In the fourth quarter of fiscal year 2001, the Company announced the
closure of three of its manufacturing facilities and the elimination of
approximately 350 employees effective August 6, 2001. A pre-tax
restructuring and impairment charge of $6.9 million was recorded in the
fourth quarter of the prior year for costs associated with the plant
closings, of which $3.3 million principally related to employee severance,
benefits costs and plant exit costs, and $3.6 million related to a fixed
asset impairment charge for real estate and machinery and equipment of the
closed facilities. As of March 31,2002 the remaining restructuring reserve
of $0.1 million was included in the Consolidated Balance Sheets as an
accrued expense in current liabilities.
Activity in the Company's restructuring reserve is summarized as follows
(dollars in thousands):
Original Cash Non-cash
Charges Payments Utilized Total
-------- -------- --------- ------
Employee severance and
other related payroll
and benefit costs $ 2,974 $(2,916) $ - $ 58
Plant exit costs and other 332 (242) - 90
Write-down of long-term assets 3,600 - (3,600) -
------- -------- -------- ------
Balance as of March 31, 2002 $ 6,906 $(3,158) $(3,600) $ 148
======= ======== ======== ======
-7-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(6) Contingencies
The Company is presently a Potentially Responsible Party ("PRP") for the
cleanup of three active sites currently listed or proposed for inclusion
on the National Priorities List ("NPL") under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA").
The Company has resolved its liability at one of these sites by completing
remedial action activities and through legal settlement. With regards to
the two sites, the Company does not anticipate incurring significant cost.
The Company believes it is not a major contributor based on the very small
volume of waste generated by the Company in relation to total volume at
these sites; however, liability under CERCLA may be joint and several. In
addition, the Company has been notified by the New York Department of
Environmental Conservation of its involvement in a disposal site in
western New York to which waste material was sent. The Company may be a
potentially responsible party for this site; however, the extent of any
financial impact upon the Company cannot be reasonably estimated at this
time.
(7) Earnings per Share
Basic and diluted earnings per share are calculated using the following
share data (amounts in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted average common
shares outstanding for
basic calculation 38,734 39,397 38,711 39,386
Add: Effect of stock options 1,164 1,045 1,272 881
------ ------ ------ ------
Weighted average common
shares outstanding for
diluted calculation 39,898 40,442 39,983 40,267
====== ====== ====== ======
As of March 31, 2002, stock options to purchase 14,200 shares of common
stock had an exercise price in excess of the average market price. These
options have been excluded from the diluted earnings per share calculation
since their effect is anti-dilutive.
(8) Segment Information
The Company's reportable segments are strategic business areas that are
managed separately and offer different products and services. The
Company's operations are classified into two main segments: wholesale and
retail home furnishings.
The wholesale home furnishings segment is principally involved in the
manufacture, sale and distribution of home furnishing products to a
network of independently owned and Ethan Allen-owned stores. Wholesale
profitability includes the wholesale gross margin, which is earned on
wholesale sales to all retail stores, including Ethan Allen-owned stores.
The retail home furnishings segment sells home furnishing products through
a network of Ethan Allen-owned stores. Retail profitability includes the
retail gross margin, which is earned based on purchases from the wholesale
segment.
-8-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(8) Segment Information (continued)
The operating segments follow the same accounting policies. The Company
evaluates performance of the respective segments based upon revenues and
operating income. Inter-segment eliminations primarily comprise the
wholesale sales and profit on the transfer of inventory between segments.
Inter-segment eliminations also include items not allocated to reportable
segments.
The following table presents segment information for the three and nine
months ended March 31, 2002 and 2001 (dollars in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES:
Wholesale segment $172,389 $188,887 $485,479 $530,220
Retail segment 115,811 104,333 331,566 311,592
Elimination of inter-company
sales (60,283) (59,429) (159,546) (164,123)
-------- -------- -------- --------
Consolidated Total $227,917 $233,791 $657,499 $677,689
======== ======== ======== ========
OPERATING INCOME:
Wholesale segment $ 32,295 $ 27,262 $ 80,032 $ 82,251
Retail segment 5,305 5,038 16,034 17,077
Elimination (1) (1,598) (1,107) (323) 2,038
-------- -------- ------- --------
Consolidated Total $ 36,002 $ 31,193 $ 95,743 $101,366
======== ======== ======== ========
CAPITAL EXPENDITURES:
Wholesale segment $ 2,163 $ 5,362 $ 8,910 $ 16,989
Retail segment 2,417 4,498 13,379 14,460
Acquisitions 31,902 12 42,386 9,722
-------- -------- -------- --------
Consolidated Total $ 36,482 $ 9,872 $ 64,675 $ 41,171
======== ======== ======== ========
TOTAL ASSETS:
Wholesale segment $436,386 $443,498
Retail segment 258,365 191,031
Inventory profit
elimination (2) (26,833) (24,793)
-------- --------
Consolidated Total $667,918 $609,736
======== ========
(1) The adjustment reflects the change in the elimination entry for profit
in ending inventory.
(2) Inventory profit elimination reflects the embedded wholesale profit in
the Company-owned store inventory that has not been realized. These
profits will be recorded when shipped to the retail customer.
There are 29 independent retail stores located outside the United States.
As of March 31, 2002 and 2001, approximately 2.0% and 2.4% of the
Company's net sales are derived from sales to these retail stores.
-9-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(9) Subsequent Event
On April 30, 2002, the Company announced its plan to close its
manufacturing facility in Randolph, Vermont employing approximately 154
employees. The Company will also close the lumber operations at its
Orleans, Vermont facility, which will reduce the number of employees by 69
from the current employee base of 501. The Company will record an after
tax restructuring charge of approximately $0.09 per diluted share in the
fourth quarter ending June 30, 2002.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussions set forth in this form 10-Q should be read in conjunction with
the financial information included herein and the Company's Annual Report on
Form 10-K for the year ended June 30, 2001. Management's discussion and analysis
of financial condition and results of operations and other sections of this
report contain forward-looking statements relating to future results of the
Company. Such forward-looking statements are identified by use of
forward-looking words such as "anticipates", "believes", "plans", "estimates",
"expects", and "intends" or words or phrases of similar expression. These
forward-looking statements are subject to various assumptions, risk and
uncertainties, including but not limited to, changes in political and economic
conditions, demand for the Company's products, acceptance of new products,
conditions in the various geographical markets where the Company does business,
developments affecting the Company's products and to those discussed in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results could differ materially from those contemplated by the
forward-looking statements.
RESULTS OF OPERATIONS:
Ethan Allen's revenues are comprised of wholesale sales to dealer-owned
and company-owned retail stores and retail sales of company-owned stores. See
Note 8 to the Company's Consolidated Financial Statements for the three and nine
months ended March 31, 2002 and 2001. The components of consolidated revenues
and operating income are as follows (dollars in millions):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUE:
Wholesale segment $172.4 $188.9 $485.5 $530.2
Retail segment 115.8 104.3 331.5 311.6
Elimination of inter-segment sales (60.3) (59.4) (159.5) (164.1)
------ ------ ------ ------
Consolidated Revenue $227.9 $233.8 $657.5 $677.7
====== ====== ====== ======
OPERATING INCOME:
Wholesale segment $ 32.3 $ 27.3 $ 80.0 $ 82.3
Retail segment 5.3 5.0 16.0 17.1
Eliminations (1.6) (1.1) (0.3) 2.0
------ ------ ------ ------
Consolidated Operating Income $ 36.0 $ 31.2 $ 95.7 $101.4
====== ====== ====== ======
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Consolidated revenue for the three months ended March 31, 2002
decreased by $5.9 million or 2.5% to $227.9 million from $233.8 million for the
three months ended March 31, 2001. Net sales for the quarter were impacted by a
reduction in consumer spending caused by a weaker economy.
Total wholesale revenue for the third quarter of fiscal year 2002
decreased by $16.5 million or 8.7% to $172.4 million from $188.9 million in the
prior year period due to softening demand.
Total retail revenue from Ethan Allen-owned stores for the three months
ended March 31, 2002 increased by $11.5 million or 11.0% to $115.8 million from
$104.3 million for the three months ended March 31, 2001. Higher retail sales
were primarily attributable to acquired store sales of $22.6 million. Comparable
store sales were lower by $8.7 million, or 8.7%, and closed stores generated
$2.4 million less sales in fiscal year 2002 as compared to fiscal year 2001. The
number of Ethan Allen-owned stores increased to 102 as of March 31, 2002 from 84
stores as of March 31, 2001. During the last twelve months, the Company acquired
20 stores from independent dealers, sold 2 company-owned stores to independent
dealers, relocated 2 stores, closed 1 store, and opened 1 new store.
-11-
Comparable stores are those which have been operating for at least 15
months. Minimal net sales, derived from the delivery of customer ordered
product, are generated during the first three months of operations of newly
opened stores. Stores acquired from dealers by Ethan Allen are included in
comparable store sales in their 13th full month of Ethan Allen-owned operations.
Booked orders for the quarter were 4.2% higher than the prior year
quarter. Booked orders include wholesale orders and written business of
company-owned retail stores. Wholesale orders for the third quarter increased
0.7% over the prior year third quarter. Orders for company-owned stores were up
16.3% and comparable Ethan Allen-owned store orders were down 2.3%.
Gross profit for the quarter was $108.4 million as compared to $103.5
million in the third quarter of the prior year. The increase of $4.9 million in
gross profit was primarily attributable to higher retail sales from acquired
stores, lower manufacturing costs, mainly favorable lumber pricing, and the
impact of the price increase effective April 2001. These increases were
partially offset by lower wholesale sales volume. Consolidated gross margin
increased to 47.6% in the third quarter from 44.3% in the prior year third
quarter principally from lower manufacturing costs, the price increase effective
April 2001, greater retail sales, and a higher proportionate share of retail
sales to total sales.
Operating expenses remained consistent with the prior year at $72.4
million or 31.8% of net sales in the current quarter as compared to $72.3
million or 30.9% of net sales for the third quarter of fiscal year 2001.
Distribution costs were lower this quarter resulting from lower wholesale
shipments. Retail delivery, warehousing and occupancy costs increased from the
addition of 18 net new Ethan Allen-owned stores since March of 2001.
Operating income for the three months ended March 31, 2002 was $36.0
million or 15.8% of net sales compared to $31.2 million or 13.3% of net sales
for the three months ended March 31, 2001. Operating income increased $4.8
million or 15.4% primarily due to higher wholesale gross profit mentioned above.
Total wholesale operating income for the third quarter of fiscal year
2002 was $32.3 million or 18.7% of net sales compared to $27.3 million or 14.4%
of net sales in the third quarter of fiscal year 2001. Wholesale operating
income increased $5.0 million or 18.3% this quarter due to lower manufacturing
costs, mainly favorable lumber pricing, lower distribution expenses resulting
from a reduction in shipments, and the impact of the price increase effective
April 2001. These increases were partially offset by lower wholesale sales
caused by softening demand.
Operating income for the retail segment increased by $0.3 million in
the third quarter to $5.3 million or 4.6% of net sales from $5.0 million or 4.8%
of net sales in the third quarter of the prior year. The increase in retail
operating income was attributable to greater retail volume generated by acquired
stores, partially offset by higher delivery, warehousing and occupancy costs
associated with the addition of 18 net new stores since March 2001.
Income tax expense of $14.0 million was recorded for the quarter versus
$12.2 million recorded in the prior year quarter. The Company's effective tax
rate was 37.8% in the current year and prior year third quarter.
For the three months ended March 31, 2002, net income increased 15.0%
to $23.0 million as compared to $20.0 million for the three months ended March
31, 2001. Earnings per diluted share of $0.58 increased 16.0% or $0.08 per
diluted share in the quarter from $0.50 per diluted share in the prior year
quarter.
-12-
NINE MONTHS ENDED MARCH 31, 2002 COMPARED TO NINE MONTHS ENDED MARCH 31, 2001
Consolidated revenue for the nine months ended March 31, 2002 decreased
by $20.2 million or 3.0% to $657.5 million from $677.7 million for the nine
months ended March 31, 2001. Sales were impacted during the last nine months
from a reduction in consumer spending caused by a weaker economy.
Wholesale revenue for the nine months ended March 31, 2002 decreased by
$44.7 million or 8.4% to $485.5 million from $530.2 million for the nine months
ended March 31, 2001 due to softening demand.
Total retail revenue from Ethan Allen-owned stores for the nine months
ended March 31, 2002 increased by $19.9 million or 6.4% to $331.5 million from
$311.6 million for the nine months ended March 31, 2001. The increase in retail
sales was attributable to greater sales generated by acquired stores of $42.1
million resulting from 18 net new stores opened during the last twelve months.
The increase in retail sales was partially offset by a decrease in comparable
store sales of $17.2 million, or 5.7%, and a decrease from closed stores, which
generated $4.1 million less sales in fiscal year 2002 as compared to fiscal year
2001. The prior year nine months ended March 31, 2001 also included a gain of
$0.9 million on the sale of a company-owned retail store to an independent
dealer. Of the stores acquired during the nine months ended March 31, 2002, 6
stores were purchased from Mr. Edward Teplitz, who subsequently joined the
Company as Vice President of Finance (see Part II, Item 5 of the Form 10-Q filed
on November 15, 2001).
Booked orders for the nine months ended March 31, 2002 were lower than
the prior year by 1.2%. Booked orders include wholesale orders and written
business of company-owned retail stores. Wholesale orders for the forty-week
period were down 3.3% compared to a thirty-nine week period in the prior year.
Orders for company-owned stores were up 7.3% and comparable Ethan Allen-owned
store orders were down 4.8% using the nine month period in the current and prior
year.
For the nine months ended March 31, 2002, gross profit decreased $5.2
million to $305.8 million from $311.0 in the prior fiscal year. Gross profit
decreased from lower wholesale sales volume, partially offset by higher retail
sales from acquired stores and from the price increase effective April 2001.
Consolidated gross margin was 46.5% for the nine months ended March 31, 2002
compared to 45.9% in the comparable prior year period principally from the price
increase effective April 2001, lower manufacturing costs, mainly favorable
lumber pricing, greater retail sales and a higher proportionate share of retail
sales to total sales. Wholesale gross margin was also negatively impacted by the
production of more affordably priced products manufactured at lower margins.
Operating expenses increased $0.4 million or 0.2% to $210.0 million or
31.9% of net sales in the current nine months as compared to $209.6 million or
30.9% of net sales for the nine month period in fiscal year 2001. This increase
was attributable to greater healthcare costs and higher occupancy, delivery and
warehousing costs associated with the addition of 18 net new Ethan Allen-owned
stores since March of 2001, partially offset by lower distribution costs
resulting from a reduction in wholesale shipments.
Operating income for the nine months ended March 31, 2002 was $95.7
million or 14.6% of net sales compared to $101.4 million or 15.0% of net sales
for the nine months ended March 31, 2001. Operating income decreased $5.7
million or 5.6% primarily from lower wholesale shipments and the gross margin
impact mentioned above, partially offset by higher retail sales generated by
acquired stores.
Total wholesale operating income for the nine month period of fiscal
year 2002 was $80.0 million or 16.5% of net sales compared to $82.3 million or
15.5% of net sales in the nine month period of fiscal year 2001. Wholesale
operating income decreased $2.3 million or 2.8% during the last nine months
primarily from lower sales volume and the production of more affordably priced
products manufactured at lower margins, partially offset by a price increase
effective April 2001. Lower manufacturing costs resulting from favorable lumber
pricing and lower distribution costs from reduced volumes also impacted
wholesale operating income.
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Operating income for the retail segment decreased by $1.1 million for
the nine months ended March 31, 2002 to $16.0 million or 4.8% of net sales from
$17.1 million or 5.5% of net sales for the nine months ended March 31, 2001. The
decrease in retail operating income was principally due to higher retail
operating expenses related to the addition of 18 net new stores since March
2001, including occupancy and delivery and warehousing costs, partially offset
by higher volume generated by the acquired stores.
Interest and other miscellaneous income of $2.6 million increased $0.8
million over the prior year from an increase in interest income of $0.3 million
and from proceeds received on the sale of real property.
Income tax expense of $37.0 million was recorded for the nine months
ended March 31, 2002 as compared to $38.8 million for the same period in the
prior year. The Company's effective tax rate was 37.8% in both the current and
prior year.
For the nine months ended March 31, 2002, net income decreased 4.5% to
$60.9 million as compared to $63.8 million for the nine months ended March 31,
2001. Earnings per diluted share of $1.52 decreased 4.4% or $0.07 per diluted
share in the current nine months from $1.59 per diluted share in the prior year.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America. Certain estimates and assumptions have been made that affect the
amounts and disclosures reported in the consolidated financial statements and
the related accompanying notes. Actual results could differ from these estimates
and assumptions. Management uses its best judgment in valuing these estimates
and may solicit external advice. Estimates are based on current facts and
circumstances, prior experience and other assumptions believed to be reasonable.
Critical accounting policies that may affect the consolidated financial
statements include self-insurance, restructuring and environmental liabilities,
long-lived asset valuations and impairments, and inventory reserves.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal sources of liquidity are cash flow from
operations and borrowing capacity under a revolving credit facility. Net cash
provided by operating activities totaled $98.5 million for the nine months ended
March 31, 2002 as compared to $70.4 million for the nine months ended March 31,
2001. The increase of $28.1 million in net cash provided by operating activities
principally resulted from lower inventory, and to a lesser extent, from changes
in other working capital balances during the nine months ended March 31, 2002 as
compared to the same period in the prior year. The majority of the decrease in
inventory resulted from temporary plant shutdowns during the last nine months
and reductions made in on-hand raw materials.
During the nine months ended March 31, 2002, capital spending,
exclusive of acquisitions, totaled $22.3 million as compared to $31.4 million
for the nine months ended March 31, 2001. Capital expenditures made during the
current nine months primarily included (i) new retail store construction and
store interior redesigns, (ii) manufacturing capital equipment purchases and
upgrades, and (iii) plant expansion projects. Capital expenditures for fiscal
year 2002, exclusive of acquisitions, are anticipated to be approximately $30.0
million. The Company expects to incur additional expenditures for retail and
other acquisitions during this fiscal year and anticipates that cash from
operations will be sufficient to fund this level of capital expenditures and
acquisitions.
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Net cash used in financing activities of $24.5 million increased by
$11.5 million due to the repurchase of the Company's common stock during the
nine months ended March 31, 2002. At March 31, 2002, there were no revolving
loans outstanding. The Company had $19.5 million of trade and standby letters of
credit outstanding, leaving $105.5 million available under its revolving credit
facility at March 31, 2002. Total debt outstanding at March 31, 2002 was $9.3
million
The Company has been authorized by its Board of Directors to repurchase
its common stock from time to time, either directly or through agents, in the
open market at prices and on terms satisfactory to the Company. The Company also
repurchases shares of common stock from terminated or retiring employee's
accounts in the Ethan Allen Retirement Saving Plan and the Company retires
shares of unvested restricted stock. The Company's common stock repurchases are
recorded as treasury stock and result in a reduction of shareholders' equity.
For the nine months ended March 31, 2002 and 2001, the Company
repurchased the following shares of its common stock (excluding retirements):
Nine Months Ended
March 31,
2002 2001
----------- ---------
Cost to repurchase common shares $21,056,478 $670,868
Common shares repurchased 741,151 22,700
Average price per share $28.41 $29.55
The Company funded its common stock repurchases through available cash
and cash from operations. As of March 31, 2002, the Company had a remaining
Board authorization to purchase 2,000,000 shares of common stock.
As of March 31, 2002, aggregate scheduled maturities of long-term debt
for each of the next five fiscal years were $0.1 million, $0.1 million, $4.7
million, $0.1 million and $0.1 million, respectively. Management believes that
its cash flow from operations, together with its other available sources of
liquidity, will be adequate to make all required payments of principal and
interest on its debt, to permit anticipated capital expenditures and
acquisitions and to fund working capital and other cash requirements over the
next twelve months. As of March 31, 2002, the Company had working capital of
$174.6 million and a current ratio of 2.44 to 1.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of March 31, 2002, the Company was essentially debt-free. Cash and
short-term investments totaled $62.3 million and there were no revolving loans
outstanding under the Credit Facility. Current debt as of March 31, 2002 was
$0.1 million and total long-term debt outstanding was $9.2 million.
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company's policy has been to utilize United States
dollar denominated borrowings to fund its working capital and investment needs.
Short term debt, if required, is used to meet working capital requirements and
long term debt is generally used to finance long term investments. There is
inherent roll-over risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and the Company's future financing
requirements.
The Company has one long-term debt instrument outstanding with a
variable interest rate. This debt instrument has a principal balance of $4.6
million, which matures in 2004. Based on the principal balance outstanding, a
one percentage point increase in the variable interest rate would not have had a
significant impact on the Company's interest expense.
Currently, the Company does not enter into financial instrument
transactions for trading or other speculative purposes or to manage interest
rate exposure.
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PART II. OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
There has been no change to matters discussed in Business-Legal
Proceedings in the Company's Form 10-K as filed with the Securities and Exchange
Commission on September 17, 2001.
ITEM 2. - CHANGES IN SECURITIES
None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. - OTHER INFORMATION
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10(k)-2 Second Amendment to Amended and Restated Consumer
Credit Card Program Agreement, dated as of February 1, 2002,
by and among the Company and Monogram Credit Card Bank of Georgia.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the
reporting period.
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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: 05/13/02 BY: /s/ M. Farooq Kathwari
----------------- ------------------------------
M. Farooq Kathwari
Chairman of the Board
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: 05/13/02 BY: /s/ Edward D. Teplitz
----------------- ------------------------------
Edward D. Teplitz
Vice President, Finance
(Principal Financial Officer)
DATE: 05/13/02 BY: /s/ Michele Bateson
----------------- ------------------------------
Michele Bateson
Corporate Controller
(Principal Accounting Officer)
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