Our revenues are comprised of (i) wholesale sales to independently-owned and Company-owned retail IDCs and (ii) retail sales of Company-owned IDCs. See Note 12 to our Consolidated Financial Statements for the three and nine months ended March 31, 2007 and 2006.
The components of consolidated revenue and operating income were as follows (in millions):
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Retail revenue from Ethan Allen-owned IDCs for the three months ended March 31, 2007 decreased by $0.5 million, or 0.3%, to $167.7 million from $168.2 million for the three months ended March 31, 2006. The decrease in retail sales by Ethan Allen-owned IDCs was attributable to a decrease in comparable IDC delivered sales of $13.8 million, or 8.6%, and reduced revenue from sold and closed IDCs, which generated $3.7 million fewer sales in the third quarter of fiscal 2007 as compared to the same period in fiscal 2006. These unfavorable variances were largely offset by sales generated by newly opened (including relocated) or acquired IDCs of $17.0 million. The number of Ethan Allen-owned IDCs increased to 154 as of March 31, 2007 as compared to 134 as of March 31, 2006. During that twelve month period, we acquired 14 IDCs from independent retailers and opened 11 IDCs (5 of which were relocations).
Comparable IDCs 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) IDCs. IDCs acquired by us from independent retailers are included in comparable IDC sales in their 13th full month of Ethan Allen-owned operations.
Quarter-over-quarter, written business of Ethan Allen-owned IDCs increased 2.1% and comparable IDC written business decreased 7.1%. Over that same period, wholesale orders decreased 13.2%. Retail written business reflects the softer retail environment for home furnishings noted throughout much of the current period, likely offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product introductions, and (iii) our use of national television as an advertising medium throughout much of the quarter. Wholesale written business reflects the impact of the aforementioned factors.
Gross profit decreased during the quarter to $128.5 million from $134.7 million in the prior year comparable quarter. The $6.2 million, or 4.6%, decrease in gross profit was primarily attributable to a decline in wholesale sales volume and inefficiencies associated with our Spruce Pine, North Carolina manufacturing operation as a result of the phase-out of production at this facility during the period. Partially offsetting these factors were (i) a shift in sales mix with retail sales representing a higher proportionate share of total sales in the current quarter (68%) compared to the prior year period (63%), and (ii) improved performance within our remaining product sourcing operations, including price stabilization with regard to the cost of foam and a reduction in overhead as a result of past plant closures. Consolidated gross margin increased to 52.1% in the third quarter of fiscal 2007 from 50.5% in the prior year quarter as a result, primarily, of the factors set forth above.
Operating profit, the elements of which are discussed in greater detail below, was impacted by the following items during the three months ended March 31, 2007 and 2006:
Operating expenses decreased $1.0 million, or 1.0%, to $100.4 million, or 40.7% of net sales, in the current quarter from $101.4 million, or 38.0% of net sales, in the prior year quarter. The decrease was primarily attributable to (i) lower costs experienced within our distribution operations, a portion of which is a result of the aforementioned decrease in volume, (ii) a decrease within certain compensation and benefit related expenses, and (iii) a reduction in operating costs associated with closed manufacturing facilities, including reduced losses incurred in connection with the disposition of certain property, plant and equipment. These decreases were partially offset by (i) an increase in national television advertising costs, and (ii) increased costs associated with our continued efforts to reposition the retail network which, during the period, resulted in higher costs associated with occupancy, managerial salaries and benefits, and delivery and warehousing.
Consolidated operating income for the three months ended March 31, 2007 totaled $28.1 million, or 11.4% of net sales, as compared to $33.3 million, or 12.5% of net sales, for the three months ended March 31, 2006. This represents a decrease of $5.2 million which was primarily attributable to a decline in gross profit, partially offset by lower period-over-period operating expenses, both of which were discussed previously.
Wholesale operating income for the three months ended March 31, 2007 totaled $31.9 million, or 18.5% of net sales, as compared to $34.0 million, or 17.7% of net sales, in the prior year comparable quarter. The decrease of $2.1 million was primarily attributable to (i) a decrease in wholesale sales volume, (ii) inefficiencies experienced with manufacturing
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
facilities closed during the period, and (iii) an increase in national television advertising costs. These factors were partially offset by the favorable impact of (i) improved performance within our remaining product sourcing operations, (ii) lower distribution costs, (iii) a decrease in compensation and benefit related expenses, and (iv) a reduction in operating costs associated with closed manufacturing facilities, including reduced losses incurred in connection with the disposition of certain property, plant and equipment.
Retail operating income decreased $0.2 million to ($0.1) million, or (0.1%) of sales, for the third quarter of fiscal 2007, from $0.1 million, or 0.1% of sales, for the third quarter of fiscal 2006. The decrease in retail operating income generated by Ethan Allen-owned IDCs was primarily attributable to a reduction in sales volume generated by comparable IDCs and IDCs closed or sold during the period, and higher operating expenses as a result of our continued efforts to reposition the retail network. These decreases were partially offset by higher sales volume generated by newly-opened (including relocations) or acquired IDCs.
Interest and other miscellaneous income, net increased $0.6 million from the prior year comparable quarter. The increase was a result, primarily, of prior year losses incurred in connection with our past joint venture with U.K.-based MFI Furniture Group, Plc. As of June 30, 2006, that joint venture had been terminated.
Interest and other related financing costs amounted to $2.9 million, a decrease of $0.1 million from the prior year period. This amount is comprised, primarily, of interest expense incurred in connection with our issuance of senior unsecured debt in September 2005.
Income tax expense for the three months ended March 31, 2007 totaled $10.0 million as compared to $12.0 million for the three months ended March 31, 2006. Our effective tax rate for the current quarter was 36.4%, down from 37.5% in the prior year quarter. The lower effective tax rate was a result, primarily, of the benefits derived from the manufacturers’ deduction provided for under The Jobs Creation Act of 2004 and certain tax planning initiatives. Partially offsetting these items were the adverse effects of recently-enacted changes within certain state tax legislation, increased state income tax liability arising in connection with the operation of a greater number of Company-owned IDCs, and increased foreign income tax liability associated with our five retail IDCs operating in Canada.
For the three months ended March 31, 2007, we recorded net income of $17.5 million as compared to $20.0 million in the prior year comparable period. Net income per diluted share totaled $0.54 in the current quarter and $0.59 per diluted share in the prior year quarter.
Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006
Consolidated revenue for the nine months ended March 31, 2007 decreased by $47.6 million, or 6.0%, to $746.8 million, from $794.4 million for the nine months ended March 31, 2006. Net sales for the period largely reflect the delivery of product associated with booked orders and backlog existing as of beginning of the period. During the period, sales were impacted by (i) a weak retail environment for home furnishings, and (ii) the prior year effects of a more favorable economic environment and our initiative to reduce the lead time associated with product delivery to both our independent retailers and consumers, both of which resulted in a substantial reduction in backlog during the nine months ended March 31, 2006. These factors were partially offset by (i) the positive effects of our continued efforts to reposition the retail network, and (ii) new product introductions.
Wholesale revenue for the first nine months of fiscal 2007 decreased by $65.0 million, or 11.6%, to $493.2 million from $558.2 million in the prior year comparable period. The year-over-year decrease was primarily attributable to a decline in the incoming order rate as a result of the softer retail environment for home furnishings noted throughout much of the current period.
Retail revenue from Ethan Allen-owned IDCs for the nine months ended March 31, 2007 increased by $4.5 million, or 0.9%, to $511.1 million from $506.6 million for the nine months ended March 31, 2006. The increase in retail sales by
27
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Ethan Allen-owned IDCs was attributable to higher sales generated by newly opened (including relocated) or acquired IDCs of $44.8 million. This favorable variance was partially offset by unfavorable variances related to a decrease in comparable IDC delivered sales of $30.7 million, or 6.4%, and reduced revenue from sold and closed IDCs, which generated $9.6 million fewer sales during the first nine months of fiscal 2007 as compared to the same period in fiscal 2006.
Year-over-year, written business of Ethan Allen-owned IDCs increased 1.8% and comparable IDC written business decreased 6.1%. Over that same period, wholesale orders decreased 10.6%. Retail written business reflects the softer retail environment for home furnishings noted throughout much of the current period, likely offset, to some degree, by (i) our continued efforts to reposition the retail network, (ii) recent product introductions, and (iii) our use of national television as an advertising medium throughout much of the period. Wholesale written business also reflects the impact of the aforementioned factors.
Gross profit decreased during the period to $388.6 million from $401.1 million in the prior year comparable period. The $12.5 million, or 3.1%, decrease in gross profit was primarily attributable to a decline in wholesale sales volume and inefficiencies experienced within our Spruce Pine, North Carolina and Atoka, Oklahoma manufacturing operations as a result of the phase-out of production at these facilities during the period. Partially offsetting these factors were (i) a shift in sales mix with retail sales representing a higher proportionate share of total sales in the current quarter (68%) compared to the prior year period (64%), (ii) the impact of selected price increases implemented during March and September 2006, and (iii) improved performance within our remaining product sourcing operations, including price stabilization with regard to the cost of foam and a reduction in overhead as a result of past plant closures. Gross profit also benefited, to a lesser degree, from a gain associated with business interruption insurance recoveries received during the period related to hurricane losses sustained during fiscal 2006. Consolidated gross margin increased to 52.0% for the first nine months of fiscal 2007 from 50.5% in the prior year period as a result, primarily, of the factors set forth above.
Operating profit, the elements of which are discussed in greater detail below, was impacted by the following items during the nine months ended March 31, 2007 and 2006:
On September 6, 2006, we announced a plan to close our Spruce Pine, North Carolina case goods manufacturing facility and convert our Atoka, Oklahoma upholstery manufacturing facility into a regional distribution center. In connection with this initiative, we have permanently ceased production at both locations, allocating production among our remaining domestic manufacturing locations and selected offshore vendors. The decision impacted approximately 465 employees with the reduction in headcount occurring throughout the second and third quarters of fiscal 2007. We recorded a pre-tax restructuring and impairment charge of $14.1 million during the quarter ended September 30, 2006, of which $4.0 million was related to employee severance and benefits and other plant exit costs, and $10.1 million, which was non-cash in nature, was related to fixed asset impairment charges, primarily for real property and machinery and equipment, stemming from the decision to cease production activities. During the three months ended March 31, 2007 and December 31, 2006, adjustments totaling $0.2 million and $0.3 million, respectively, were recorded to reverse remaining previously established accruals which were no longer deemed necessary.
On September 7, 2005, we announced a plan to convert another of our existing manufacturing facilities into a regional distribution center. The facility, formerly involved in the production of wood case goods furniture, is located in Dublin, Virginia. In connection with this initiative, we permanently ceased production at the Dublin location, allocating production among our remaining domestic manufacturing locations and selected offshore vendors, and have consolidated the distribution operations of our existing Old Fort, North Carolina location into this larger facility. The decision impacted approximately 325 employees, of which approximately 75 have been employed in new positions. We recorded a pre-tax restructuring and impairment charge of $4.2 million during the quarter ended September 30, 2005, of which $1.3 million was related to employee severance and benefits and other plant exit costs, and $2.9 million, which was non-cash in nature, was related to fixed asset impairment charges, primarily for machinery and equipment, stemming from the decision to cease production activities. During the six months ended December 31, 2006, adjustments
28
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
totaling $0.2 million were recorded to reverse remaining previously established accruals which were no longer deemed necessary.
Including the restructuring and impairment charges referred to above, operating expenses increased $14.4 million, or 4.9%, to $309.7 million, or 41.5% of net sales, in the current period from $295.3 million, or 37.2% of net sales, in the prior year period. This increase was primarily attributable to increased costs associated with (i) our continued efforts to reposition the retail network which, during the period, resulted in higher costs associated with occupancy, managerial salaries and benefits, delivery and warehousing, and designer compensation, and (ii) the period-over-period change in the aforementioned restructuring and impairment charges. Partially offsetting these increases were (i) a decrease within certain compensation and benefit related costs, including share-based compensation expense, and (ii) a reduction in operating costs associated with closed manufacturing facilities, including reduced losses incurred in connection with the disposition of certain property, plant and equipment.
Including the restructuring and impairment charges referred to above, consolidated operating income for the nine months ended March 31, 2007 totaled $78.8 million, or 10.6% of net sales, compared to $105.8 million, or 13.3% of net sales, for the nine months ended March 31, 2006. This represents a decrease of $27.0 million which was primarily attributable to (i) higher period-over-period operating expenses and (ii) a decline in gross profit, both of which were discussed previously.
Including the restructuring and impairment charges referred to above, wholesale operating income for the nine months ended March 31, 2007 totaled $73.4 million, or 14.9% of net sales, as compared to $97.3 million, or 17.4% of net sales, in the prior year comparable period. The decrease of $23.9 million was primarily attributable to (i) a decline in wholesale sales volume, (ii) the period-over-period change in the aforementioned restructuring and impairment charges, and (iii) inefficiencies experienced within our Spruce Pine, North Carolina and Atoka, Oklahoma manufacturing operations as a result of the phase-out of production at these facilities during the period. These factors were partially offset by (i) a reduction in certain compensation and benefit related costs, including share-based compensation expense, (ii) the impact of selected price increases implemented during March and September 2006, (iii) improved performance within our remaining product sourcing operations, including price stabilization with regard to the cost of foam and a reduction in overhead as a result of past plant closures, and (iv) a decrease in operating costs associated with closed manufacturing facilities, including reduced losses incurred in connection with the disposition of certain property, plant and equipment.
Retail operating income decreased $2.7 million to $8.5 million, or 1.7% of sales, for the first nine months of fiscal 2007, from $11.2 million, or 2.2% of sales, for the first nine months of fiscal 2006. The decrease in retail operating income generated by Ethan Allen-owned IDCs was primarily attributable to higher operating expenses as a result of our continued efforts to reposition the retail network and a decline in sales volume associated with comparable IDCs and IDCs closed or sold during the period. These unfavorable variances were partially offset by higher sales volume generated by newly-opened (including relocations) or acquired IDCs and, to a lesser extent, the aforementioned gain associated with business interruption insurance recoveries.
Interest and other miscellaneous income, net increased $4.2 million from the prior year comparable period. The increase was due, primarily, to (i) increased investment income resulting from higher interest rates and higher cash and short-term investment balances maintained during the current period, and (ii) prior year losses incurred in connection with our past joint venture with U.K.-based MFI Furniture Group, Plc. As of June 30, 2006, that joint venture had been terminated.
Interest and other related financing costs increased $2.3 million from the prior year comparable period. The increase was due, primarily, to interest expense incurred in connection with our issuance of senior unsecured debt in September 2005.
Income tax expense for the nine months ended March 31, 2007 totaled $28.5 million as compared to $39.0 million for the nine months ended March 31, 2006. Our effective tax rate for the current nine month period was 36.9%, down from 38.1%
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
in the prior year comparable period. The lower effective tax rate was a result, primarily, of the benefits derived from the manufacturers’ deduction provided for under The Jobs Creation Act of 2004 and certain tax planning initiatives. Partially offsetting these items were the adverse effects of recently-enacted changes within certain state tax legislation, increased state income tax liability arising in connection with the operation of a greater number of Company-owned IDCs, and increased foreign income tax liability associated with our five retail IDCs operating in Canada.
For the nine months ended March 31, 2007, we recorded net income of $48.7 million as compared to $63.3 million in the prior year comparable period. Net income per diluted share totaled $1.50 in the current nine month period and $1.85 per diluted share in the prior year period.
Liquidity and Capital Resources
As of March 31, 2007 we maintained cash and cash equivalents totaling $132.9 million. Our principal sources of liquidity include cash and cash equivalents, cash flow from operations, and borrowing capacity under a $200.0 million revolving credit facility.
The credit facility includes an accordion feature which provides for an additional $100.0 million of liquidity, if needed, as well as sub-facilities for trade and standby letters of credit of $100.0 million and swingline loans of $5.0 million. The credit facility contains various covenants which may limit our ability to: incur debt; engage in mergers and consolidations; make restricted payments; sell certain assets; make investments; and issue stock. We are also required to meet certain financial covenants including a fixed charge coverage ratio, which shall not be less than 3.00 to 1 for any period of four consecutive fiscal quarters ended on or after June 30, 2005, and a leverage ratio, which shall not be greater than 3.00 to 1 at any time. As of March 31, 2007, we had satisfactorily complied with these covenants.
In addition, on September 27, 2005, we completed a private offering of $200.0 million in ten-year senior unsecured notes due 2015 (the "Senior Notes"). The Senior Notes were offered by Ethan Allen Global, Inc. ("Global"), a wholly-owned subsidiary of the Company, and have an annual coupon rate of 5.375%. The net proceeds of $198.4 million are being utilized to expand our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes.
In connection with the issuance of the Senior Notes, Global, in July and August 2005, entered into 6 separate forward contracts to hedge the risk-free interest rate associated with $108.0 million of the related debt in order to mitigate the negative impact of interest rate fluctuations on earnings, cash flows and equity. The forward contracts were entered into with a major banking institution thereby mitigating the risk of credit loss. Upon issuance of the Senior Notes and settlement of the related forward contracts, losses totaling $0.9 million were incurred representing the change in the fair value of the forward contracts since their respective trade dates. In accordance with SFAS No. 133, Accounting for Certain Derivative Instruments and Certain Hedging Activities, as amended, it was determined that a portion of the related losses was the result of hedge ineffectiveness and, as such, $0.1 million of the losses was included, within interest and other related financing costs, in the Consolidated Statement of Operations for the three month period ended September 30, 2005. The balance of the losses is included (on a net-of-tax basis) in the Consolidated Balance Sheets within accumulated other comprehensive income and is being amortized to interest expense over the life of the Senior Notes. The remaining unamortized balance of these forward contract losses totaled $0.7 million ($0.4 million, net-of-tax) as of March 31, 2007.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
A summary of net cash provided by (used in) operating, investing, and financing activities for the nine month periods ended March 31, 2007 and 2006 is provided below (in millions):
| Nine Months Ended
March 31,
|
|---|
| 2007
| 2006
|
|---|
| Operating Activities: | | | | | | | | |
| Net income plus depreciation and amortization | | | $ | 66 | .0 | $ | 79 | .4 |
| Working capital | | | | (5 | .2) | | 4 | .5 |
| Excess tax benefits from share-based payment arrangements | | | | (4 | .9) | | (0 | .4) |
| Other (non-cash items, long-term assets and liabilities) | | | | 14 | .0 | | 8 | .5 |
|
|
|
| Total provided by operating activities | | | $ | 69 | .9 | $ | 92 | .0 |
|
|
|
| Investing Activities: | | |
| Capital expenditures | | | $ | (47 | .5) | $ | (28 | .3) |
| Acquisitions | | | | (11 | .4) | | (6 | .3) |
| Asset sales | | | | 1 | .7 | | 2 | .4 |
| Other | | | | 0 | .1 | | — | |
|
|
|
| Total used in investing activities | | | $ | (57 | .1) | $ | (32 | .2) |
|
|
|
| Financing Activities: | | |
| Revolving credit borrowings (payments), net | | | $ | — | | $ | (8 | .0) |
| Issuances (payments) of long-term debt, net | | | | — | | | 198 | .4 |
| Issuances of common stock | | | | 0 | .2 | | 1 | .9 |
| Purchases and other retirements of company stock | | | | (40 | .2) | | (51 | .2) |
| Payment of cash dividends | | | | (18 | .5) | | (17 | .2) |
| Payment of deferred financing costs | | | | (0 | .1) | | (2 | .1) |
| Excess tax benefits from share-based payment arrangements | | | | 4 | .9 | | 0 | .4 |
|
|
|
| Total provided by (used in) financing activities | | | $ | (53 | .7) | $ | 122 | .2 |
|
|
|
Operating Activities
As compared to the same period in 2006, cash provided by operating activities decreased $22.1 million during the nine months ended March 31, 2007 as a result, primarily, of (i) lower sales and operating income, (ii) changes in working capital (accounts receivable, inventories, prepaid and other current assets, customer deposits, payables, and accrued expenses and other current liabilities) arising in the ordinary course of business, and (iii) changes in excess tax benefits arising in connection with the exercise of share-based awards. In addition, operating cash flow for the nine month period includes the effects of changes in several other non-cash items, including restructuring and impairment charges, losses incurred in connection with the sale of certain property, plant and equipment during the period, and compensation expense related to share-based awards.
Investing Activities
As compared to the same period in 2006, cash used in investing activities increased $24.9 million during the nine months ended March 31, 2007 due, primarily, to an increase in cash utilized to fund capital expenditures and acquisition activity. The current level of capital spending is principally attributable to (i) new IDC development and renovation, (ii) conversion of the Atoka, Oklahoma and Dublin, Virginia manufacturing facilities into regional distribution centers, (iii) entity-wide technology initiatives, and (iv) improvements within our remaining manufacturing facilities. We anticipate that cash from operations will be sufficient to fund future capital expenditures.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Financing Activities
As compared to the same period in 2006, cash used in financing activities increased $175.9 million during the nine months ended March 31, 2007 as a result, primarily, of our receipt of the net proceeds from the issuance of the Senior Notes in the prior year period. The decrease in cash provided as a result of this item was partially offset by (i) a reduction in payments related to the acquisition of treasury stock, (ii) a decrease in cash utilized to fund net borrowing activity on our revolving credit facility, and (iii) changes in excess tax benefits arising in connection with the exercise of share-based awards. On January 23, 2007, we declared a dividend of $0.20 per common share, payable on April 25, 2007, to shareholders of record as of April 10, 2007. We expect to continue to declare quarterly dividends for the foreseeable future.
As of March 31, 2007, our outstanding debt totaled $202.9 million, the current and long-term portions of which amounted to less than $0.1 million and $202.9 million, respectively. The aggregate scheduled maturities of long-term debt for each of the next five fiscal years are: less than $0.1 million in each of fiscal 2008, 2009, and 2010; and $3.9 million in fiscal 2011. The balance of our long-term debt ($198.8 million) matures in fiscal years 2012 and thereafter.
We had no revolving loans outstanding under the credit facility as of March 31, 2007, and stand-by letters of credit outstanding under the facility at that date totaled $16.1 million. Remaining available borrowing capacity under the facility was $183.9 million at March 31, 2007.
We believe that our cash flow from operations, together with our other available sources of liquidity, 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 March 31, 2007, we had working capital of $246.7 million and a current ratio of 2.74 to 1.
In addition to using available cash to fund changes in working capital, necessary capital expenditures, acquisition activity, the repayment of debt, and the payment of dividends, we have been authorized by our Board of Directors to repurchase 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 nine months ended March 31, 2007 and 2006, we repurchased and/or retired the following shares of our common stock:
| Nine Months Ended
March 31, |
|---|
| 2007(1)(2)(3)
| 2006
|
|---|
| Common shares repurchased | | | | 1,059,500 | | | 1,606,900 | |
| Cost to repurchase common shares | | | $ | 37,012,601 | | $ | 51,136,909 | |
| Average price per share | | | | $34.93 | | | $31.82 | |
| (1) | Repurchase activity for the nine months ended March 31, 2007 includes $3,447,946 in common stock repurchases with a March 2007 trade date and an April 2007 settlement date and excludes $1,000,807 in common stock repurchases with a June 2006 trade date and a July 2006 settlement date. |
| (2) | During February 2007, we also retired 369,601 shares of common stock tendered upon the exercise of outstanding employee stock options (272,556 to cover share exercise and 97,045 to cover related employee tax withholding liabilities). The total value of such shares on the date redeemed was $14,351,607, representing an average price per share of $38.83. |
| (3) | During August 2006, we also retired 185,930 shares of common stock tendered upon the exercise of outstanding employee stock options (137,517 to cover share exercise and 48,413 to cover related employee tax withholding liabilities). The total value of such shares on the date redeemed was $7,154,586, representing an average price per share of $38.48. |
For each of the periods presented above, we funded our purchases of treasury stock with existing cash on hand and cash generated through current period operations. On July 25, 2006, the Board of Directors increased the then remaining share repurchase authorization to 2,500,000 shares. As of March 31, 2007, we had a remaining Board authorization to repurchase 1,891,800 shares. During April and May 2007, we purchased, in two separate open market transactions on two different trading days, 62,700 shares of our common stock at a total cost of $2,152,334, or $34.33 per share.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
Off-Balance Sheet Arrangements and Other Commitments, Contingencies and Contractual Obligations
Except as indicated below, 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.
In connection with the issuance of the Senior Notes, Global, in July and August 2005, entered into 6 separate forward contracts to hedge the risk-free interest rate associated with $108.0 million of the related debt in order to mitigate the negative impact of interest rate fluctuations on earnings, cash flows and equity. The forward contracts were entered into with a major banking institution thereby mitigating the risk of credit loss. Upon issuance of the Senior Notes in September 2005, the related forward contracts were settled. At the present time we have no current plans to engage in further hedging activities.
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. Details of those arrangements for which we act as guarantor or obligor are provided below.
Retailer-Related Guarantees |
We have obligated ourselves, on behalf of one of our independent retailers, with respect to a $1.5 million credit facility (the "Credit Facility") comprised of a $1.1 million revolving line of credit and a $0.4 million term loan. This obligation requires us, in the event of the retailer’s default under the Credit Facility, to repurchase the retailer’s inventory, applying such purchase price to the retailer’s outstanding indebtedness under the Credit Facility. Our obligation remains in effect for the life of the term loan which expires in April 2008. The maximum potential amount of future payments (undiscounted) that we could be required to make under this obligation is limited to the amount outstanding under the Credit Facility at the time of default (subject to pre-determined lending limits based on the value of the underlying inventory) and, as such, is not an estimate of future cash flows. No specific recourse or collateral provisions exist that would enable recovery of any portion of amounts paid under this obligation, except to the extent that we maintain the right to take title to the repurchased inventory. We anticipate that the repurchased inventory could subsequently be sold through our retail IDC network.
As of March 31, 2007, the amount outstanding under the Credit Facility totaled approximately $1.0 million, substantially all of which was outstanding under the revolving credit line. Based on the underlying creditworthiness of the respective retailer, we believe this obligation will expire without requiring funding by us. However, in accordance with the provisions of FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, a liability has been established to reflect our non-contingent obligation under this arrangement as a result of modifications made to the Credit Facility subsequent to January 1, 2003. As of March 31, 2007, the carrying amount of such liability is less than $50,000.
Product Warranties
Our products, including our case goods, upholstery and home accents, generally carry explicit product warranties that extend from three to five 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 occasion, 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 to be both
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
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. As of March 31, 2007, our product warranty liability totaled $1.3 million.
Business Outlook
While we cannot forecast, with any degree of certainty, changes in the various macro-economic factors that influence the incoming order rate, we believe that we are well-positioned for the next phase of economic growth based upon our existing business model which includes: (i) an established brand; (ii) a comprehensive complement of home decorating solutions; and (iii) a vertically-integrated operating structure.
As macro-economic factors change, however, it is also possible that our costs associated with production (including raw materials and labor), distribution (including freight and fuel charges), and retail operations (including compensation and benefits, delivery and warehousing, occupancy, and advertising expenses) may increase. We cannot reasonably predict when, or to what extent, such events may occur or what effect, if any, such events may have on our consolidated financial condition or results of operations.
The home furnishings industry remains extremely competitive with respect to both the sourcing of products and the retail sale of those products. Domestic manufacturers continue to face pricing pressures as a result of the manufacturing capabilities developed during recent years in other countries, specifically within Asia. In response to these pressures, a large number of U.S. furniture manufacturers and retailers, including us, have increased their overseas sourcing activities in an attempt to maintain a competitive advantage and retain market share. At the present time, we domestically manufacture and/or assemble approximately 60-65% of our products. We continue to believe that a balanced approach to product sourcing, which includes the domestic manufacture of certain product offerings coupled with the import of other selected products, provides the greatest degree of flexibility and is the most effective approach to ensuring that acceptable levels of quality, service and value are attained.
In addition, we believe that our retail strategy, which involves (i) a continued focus on providing a wide array of product solutions and superior customer service, (ii) the opening of larger, new or relocated IDCs in more prominent locations, while encouraging independent retailers to do the same, and (iii) the development of a more professional management structure within our retail network, provides an opportunity to further grow our business.
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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 and foreign currency exchange rates.
Interest rate risk exists primarily through our borrowing activities. Our policy has been to utilize United States dollar denominated borrowings to fund 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 do 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 do not impact earnings or cash flows. At March 31, 2007, we had no floating-rate debt obligations outstanding. As of that same date, our fixed-rate debt obligations consist, primarily, of the Senior Notes. The estimated fair value of the Senior Notes as of March 31, 2007, which is based, primarily, on interest rate changes subsequent to the date on which the debt was issued, and which has been determined using quoted market prices, was $189.1 million as compared to a carrying value of $198.6 million.
Foreign currency exchange risk is primarily limited to our operation of five Ethan Allen-owned retail IDCs located in Canada as substantially all purchases of imported parts and finished goods are denominated in United States dollars. As such, gains or losses resulting from market changes in the value of foreign currencies have not had, nor are they expected to have, a material effect on our consolidated results of operations.
Historically, we have not entered into financial instrument, including derivative, transactions for trading or other speculative purposes or to manage interest rate or currency exposure. However, in connection with the issuance of the Senior Notes, Global, in July and August 2005, entered into 6 separate forward contracts to hedge the risk-free interest rate associated with $108.0 million of the related debt in order to minimize the negative impact of interest rate fluctuations on earnings, cash flows and equity. The forward contracts were entered into with a major banking institution thereby mitigating the risk of credit loss. Upon issuance of the Senior Notes, the related forward contracts were settled. At the present time, we have no current plans to engage in further hedging activities.
Item 4. Controls and Procedures
Management’s Report on Disclosure Controls and Procedures
Our management, including the Chairman of the Board and Chief Executive Officer ("CEO") (our principal executive officer) and the Vice President-Finance ("VPF") (our principal financial officer), conducted an evaluation of the effectiveness of 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 VPF have concluded that, as of March 31, 2007, 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 or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
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 quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth in Note 9 to the Consolidated Financial Statements, which is incorporated by reference herein, there has been no material change 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, 2006 as filed with the Securities and Exchange Commission on September 13, 2006.
Item 1A. Risk Factors
There has been no material change to the matters discussed in Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 13, 2006.
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 Securities Exchange Act of 1934, as amended) of our common stock during the three months ended March 31, 2007 is provided below:
Period | Total Number of Shares Purchased | Average Price
Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares That May Yet Be Purchased Under the
Plans or Programs (a)(b) |
January 2007 | - | - | - | 2,473,000 |
February 2007 | - | - | - | 2,473,000 |
March 2007 | 581,200 | $35.00 | 581,200 | 1,891,800 |
|
| |
| |
Total | 581,200 | $35.00 | 581,200 | |
|
| |
| |
| (a) | 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. Subsequent to that date, the Board of Directors increased the remaining authorization as follows: from 904,755 shares to 2,500,000 shares on April 27, 2004; from 753,600 shares to 2,000,000 shares on November 16, 2004; from 691,100 shares to 2,000,000 shares on April 26, 2005; from 393,100 shares to 2,500,000 shares on November 15, 2005; and from 1,110,400 shares to 2,500,000 shares on July 25, 2006. |
| (b) | During April and May 2007, we purchased, in two separate open market transactions on two different trading days, 62,700 shares of our common stock at a total cost of $2,152,334, or $34.33 per share. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits
| Exhibit Number | Description |
| * | 31.1 | Rule 13a-14(a) Certification of Principal Executive Officer |
| * | 31.2 | Rule 13a-14(a) Certification of Principal Financial Officer |
| * | 32.1 | Section 1350 Certification of Principal Executive Officer |
| * | 32.2 | Section 1350 Certification of Principal Financial Officer |
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: | May 7, 2007 | | BY: | /s/ M. Farooq Kathwari |
Chairman, President and Chief Executive Officer
| (Principal Executive Officer) |
DATE: | May 7, 2007 | | BY: | /s/ Jeffrey Hoyt |
| Vice President, Finance and Treasurer |
(Principal Financial Officer and
Principal Accounting Officer)
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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
| 31.1 | Rule 13a-14(a) Certification of Principal Executive Officer |
| 31.2 | Rule 13a-14(a) Certification of Principal Financial Officer |
| 32.1 | Section 1350 Certification of Principal Executive Officer |
| 32.2 | Section 1350 Certification of Principal Financial Officer |
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