UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2001
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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 (I.R.S. Employer ID No.)
of incorporation or organization)
Ethan Allen Drive, Danbury, Connecticut 06811
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(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
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.
38,728,462 at December 31, 2001
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
INDEX
PAGE
Part I. Financial Information:
Item 1. Consolidated Financial Statements as of
December 31, 2001 (unaudited) and
June 30, 2001 and for the three and
six months ended December 31, 2001
and 2000 (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
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
December 31,
2001 June 30,
(unaudited) 2001
------------ --------
ASSETS
Current assets:
Cash and cash equivalents $ 63,818 $ 48,112
Accounts receivable, less allowances of $2,509
and $2,679 at December 31, 2001 and
June 30, 2001, respectively 22,495 33,055
Inventories 157,850 176,036
Prepaid expenses and other current assets 17,874 18,085
Deferred income taxes 14,847 14,789
-------- ---------
Total current assets 276,884 290,077
Property, plant and equipment, net 277,734 268,659
Intangibles, net 60,666 52,863
Other assets 6,377 7,519
-------- ---------
Total assets $ 621,661 $ 619,118
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 152 $ 131
Accounts payable 54,621 63,788
Accrued compensation and benefits 28,040 27,766
Accrued expenses 13,899 16,169
--------- ---------
Total current liabilities 96,712 107,854
Long-term debt 9,267 9,356
Other long-term liabilities 2,093 2,712
Deferred income taxes 33,039 34,413
--------- ---------
Total liabilities 141,111 154,335
Shareholders' equity:
Class A common stock, par value $.01, 150,000,000
shares authorized, 45,215,961 and 45,138,046
shares issued at December 31, 2001 and
June 30, 2001, respectively 452 451
Preferred stock, par value $.01, 1,055,000 shares
authorized, no shares issued and outstanding
at December 31, 2001 and June 30, 2001 - -
Additional paid-in capital 276,352 274,645
--------- ---------
276,804 275,096
Less: Treasury stock (at cost), 6,487,501 shares
at December 31, 2001 and 5,735,284 shares at
June 30, 2001 (150,343) (129,562)
Retained earnings 354,089 319,249
--------- ----------
Total shareholders' equity 480,550 464,783
--------- ----------
Total liabilities and shareholders' equity $ 621,661 $ 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 Six Months
Ended December 31, Ended December 31,
2001 2000 2001 2000
-------- -------- --------- ---------
Net sales $ 222,857 $ 232,667 $ 429,582 $ 443,898
Cost of sales 119,477 124,930 232,233 236,452
--------- --------- --------- ---------
Gross profit 103,380 107,737 197,349 207,446
Operating expenses:
Selling 39,886 41,478 78,724 79,383
General and administrative 30,288 29,388 58,884 57,890
--------- --------- -------- ---------
Total operating expenses 70,174 70,866 137,608 137,273
--------- --------- -------- ---------
Operating income 33,206 36,871 59,741 70,173
Interest and other miscellaneous income, net 1,046 468 1,558 641
Interest and other related financing costs 176 189 325 385
--------- --------- -------- ---------
Income before income taxes 34,076 37,150 60,974 70,429
Income tax expense 12,881 14,043 23,048 26,622
--------- --------- -------- ---------
Net income $ 21,195 $ 23,107 $ 37,926 $ 43,807
========= ========= ========= =========
PER SHARE DATA:
Basic earnings per common share:
Net income per basic share $ 0.55 $ 0.59 $ 0.98 $ 1.11
========= ========= ========= =========
Basic weighted average common
shares outstanding 38,728 39,371 38,699 39,380
Diluted earnings per common share:
Net income per diluted share $ 0.53 $ 0.58 $ 0.95 $ 1.09
========= ========= ========= =========
Diluted weighted average common
shares outstanding 39,781 40,181 40,026 40,179
See accompanying notes to consolidated financial statements.
-3-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six Months
Ended December 31,
2001 2000
-------- ---------
Operating activities:
Net income $ 37,926 $ 43,807
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,455 9,476
Compensation (income) expense related
to restricted stock award (223) 52
Provision for deferred income taxes (1,432) (1,790)
Other non-cash (income) expense (542) (800)
Change in assets and liabilities, net of
the effects from acquired and divested
companies:
Accounts receivable 8,495 3,065
Inventories 23,838 (4,122)
Prepaid and other current assets 1,120 (3,174)
Other assets 438 (620)
Accounts payable (15,380) (1,108)
Income taxes payable 3,423 1,434
Accrued expenses (2,197) 1,786
Other liabilities (619) 721
-------- --------
Net cash provided by operating activities 64,302 48,727
-------- --------
Investing activities:
Proceeds from the disposal of property, plant
and equipment 2,307 4,313
Capital expenditures (17,709) (21,589)
Acquisitions (10,484) (9,710)
Other 81 207
-------- --------
Net cash used in investing activities (25,805) (26,779)
-------- --------
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 (68) (183)
Net proceeds from issuance of common stock 1,171 190
Dividends paid (3,113) (3,139)
Payments to acquire treasury stock (20,781) (383)
-------- --------
Net cash used in financing activities (22,791) (11,515)
-------- --------
Net increase in cash and cash equivalents 15,706 10,433
Cash and cash equivalents at beginning of period 48,112 14,024
-------- --------
Cash and cash equivalents at end of period $ 63,818 $ 24,457
======== ========
See accompanying notes to consolidated financial statements.
-4-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
Six Months Ended December 31, 2001
(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 77,915 shares
of common stock upon the
exercise of stock options 1 947 - - 948
Purchase of 752,217 shares
of treasury stock - - (20,781) - (20,781)
Tax benefit associated with the
exercise of employee stock
options - 675 - - 675
Charge for early vesting of
stock options - 85 - - 85
Dividends declared on common
stock - - - (3,086) (3,086)
Net income - - - 37,926 37,926
------ -------- --------- -------- --------
Balance at December 31, 2001 $ 452 $276,352 $(150,343) $354,089 $480,550
====== ======== ========= ======== ========
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 six months ended December 31, 2001,
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 December 31, 2001 and June 30, 2001 are summarized as
follows (dollars in thousands):
December 31, June 30,
2001 2001
------------ ---------
Finished goods $105,845 $115,661
Work in process 15,766 19,521
Raw materials 36,239 40,854
-------- =-------
$157,850 $176,036
======== ========
(4) Goodwill and Other Intangible Assets
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". As of December 31, 2001 the Company had goodwill (net
of accumulated amortization) of $22.8 million and intangible assets (net of
accumulated amortization) of $37.9 million. Goodwill in the wholesale and
retail segments was $9.4 million and $13.4 million, respectively. The
wholesale segment includes intangible assets of $37.9 million. These assets
include Ethan Allen trade names and product technology, 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 Six Months
Ended December 31, Ended December 31,
2001 2000 2001 2000
-------- -------- -------- -------
Net Income:
Reported net income $21,195 $23,107 $37,926 $43,807
Add back: Goodwill amortization after-tax - 72 - 144
Add back: Intangible asset amortization after-tax - 211 - 421
------- ------- ------- -------
Adjusted net income $21,195 $23,390 $37,926 $44,372
======= ======= ======= =======
Basic Earnings per Share:
Reported earnings per share $ 0.55 $ 0.59 $ 0.98 $ 1.11
Goodwill amortization - - - -
Intangible asset amortization - - - 0.01
------- -------- ------- -------
Adjusted earnings per share $ 0.55 $ 0.59 $ 0.98 $ 1.12
======= ======== ======= =======
Diluted Earnings per Share:
Reported earnings per share $ 0.53 $ 0.58 $ 0.95 $ 1.09
Goodwill amortization - - - -
Intangible asset amortization - - - 0.01
------- -------- ------- -------
Adjusted earnings per share $ 0.53 $ 0.58 $ 0.95 $ 1.10
======= ======== ======= =======
(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 December 31, 2001, the remaining restructuring
reserve of $0.2 million was included in the Consolidated Balance Sheets as
an accrued expense in current liabilities.
-7-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(5) Restructuring and Impairment Charge (continued)
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 (236) - 96
Write-down of long-term assets 3,600 - (3,600) -
------- ------- ------- -----
Balance as of December 31, 2001 $ 6,906 $(3,152) $(3,600) $ 154
======= ======= ======= =====
(6) Contingencies
The Company has been named as a Potentially Responsible Party ("PRP") for
the cleanup of four 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 two of these sites by completing remedial
action activities or through legal settlement. With regards to the third
site, 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 the
site; however, liability under CERCLA may be joint and several. In relation
to the fourth site, the Company has been notified that it may be a
potentially responsible party for a disposal site to which waste material
was sent. 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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------ ------ ------ ------
Weighted average common
shares outstanding for
basic calculation 38,728 39,371 38,699 39,380
Add: Effect of stock options 1,053 810 1,327 799
------ ------ ------ ------
Weighted average common
shares outstanding for
diluted calculation 39,781 40,181 40,026 40,179
====== ====== ====== ======
-8-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(7) Earnings Per Share (continued)
As of December 31, 2001 and 2000, stock options to purchase 26,500 shares
and 142,425 shares of common stock, respectively, 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.
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 six
months ended December 31, 2001 and 2000 (dollars in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- ------- --------
NET SALES:
Wholesale segment $158,206 $179,378 $313,090 $341,333
Retail segment 116,915 108,733 215,755 207,259
Elimination of inter-company sales (52,264) (55,444) (99,263) (104,694)
-------- -------- -------- --------
Consolidated Total $222,857 $232,667 $429,582 $443,898
======== ======== ======== ========
OPERATING INCOME:
Wholesale segment $ 24,473 $ 28,158 $ 47,737 $ 54,392
Retail segment 7,727 6,603 10,729 12,638
Elimination (1) 1,006 2,110 1,275 3,143
-------- -------- -------- --------
Consolidated Total $ 33,206 $ 36,871 $ 59,741 $ 70,173
======== ======== ======== ========
-9-
ETHAN ALLEN INTERIORS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(unaudited)
(8) Segment Information (continued)
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
-------- -------- -------- --------
CAPITAL EXPENDITURES:
Wholesale segment $ 2,493 $ 5,900 $ 6,747 $ 11,627
Retail segment 7,085 6,504 10,962 9,962
Acquisitions 118 9,710 10,484 9,710
-------- -------- -------- --------
Consolidated Total $ 9,696 $ 22,114 $ 28,193 $ 31,299
======== ======== ======== ========
TOTAL ASSETS:
Wholesale segment $439,617 $421,324
Retail segment 206,214 181,492
Inventory profit elimination (2) (24,170) (23,882)
-------- --------
Consolidated Total $621,661 $578,934
======== ========
(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 December 31, 2001 and 2000, approximately 2.0% and 2.3% of the
Company's net sales are derived from sales to these retail stores.
-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 six
months ended December 31, 2001 and 2000. The components of consolidated revenues
and operating income are as follows (dollars in millions):
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
------ ------ ------ ------
Revenue:
Wholesale segment $158.2 $179.4 $313.1 $341.3
Retail segment 116.9 108.7 215.8 207.3
Elimination of inter-segment sales (52.2) (55.4) (99.3) (104.7)
------ ------ ------ ------
Consolidated Revenue $222.9 $232.7 $429.6 $443.9
====== ====== ====== ======
Operating Income:
Wholesale segment $ 24.5 $ 28.2 $ 47.7 $ 54.4
Retail segment 7.7 6.6 10.7 12.6
Eliminations 1.0 2.1 1.3 3.2
------ ------ ------ ------
Consolidated Operating Income $ 33.2 $ 36.9 $ 59.7 $ 70.2
====== ====== ====== ======
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2000
Consolidated revenue for the three months ended December 31, 2001
decreased by $9.8 million or 4.2% to $222.9 million from $232.7 million for the
three months ended December 31, 2000. Similar to the first quarter, sales were
negatively impacted during the last three months from slowing demand caused by a
weaker economy.
Total wholesale revenue for the second quarter of fiscal year 2002
decreased by $21.2 million or 11.8% to $158.2 million from $179.4 million in the
prior year period due to softening demand.
Total retail revenue from Ethan Allen-owned stores for the three months
ended December 31, 2001 increased by $8.2 million or 7.5% to $116.9 million from
$108.7 million for the three months ended December 31, 2000. Higher retail sales
were attributable to an increase in sales generated by newly opened or acquired
stores of $16.5 million, partially offset by a decrease in comparable store
sales of $6.8 million, or 6.4%, and by a decrease from closed stores, which
generated $1.5 million less sales in fiscal year 2002 as compared to fiscal year
2001. The number of Ethan Allen-owned stores increased to 93 as of December 31,
2001 as compared to 84 as of December 31, 2000. The Company acquired 10 stores
from independent dealers, sold 1 company-owned store to an independent dealer,
relocated 3 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 0.2% higher than the prior year
quarter. Booked orders include wholesale orders and written business of
company-owned retail stores. Wholesale orders for the thirteen-week period were
down 2.5% compared to a twelve-week period in the prior year. Orders for
company-owned stores were up 12.2% and comparable Ethan Allen-owned store orders
were down 1.0% using the twelve-week period in both the current year and prior
year second quarter.
Gross profit for the quarter was $103.4 million as compared to $107.7
million in the second quarter of the prior year. The decrease of $4.3 million in
gross profit was attributable to lower wholesale sales volume, partially offset
by higher retail volume and a price increase effective April 2001. Consolidated
gross margin increased to 46.4% in the second quarter of fiscal year 2002 from
46.3% in the prior year second quarter principally from an increase in retail
sales and from a higher proportionate share of retail sales to total sales.
Wholesale production was curtailed this quarter through temporary plant
shutdowns and costs associated with the shutdowns negatively impacted gross
profit.
Operating expenses decreased $0.7 million or 1.0% to $70.2 million or
31.5% of net sales in the current quarter as compared to $70.9 million or 30.5%
of net sales for the second quarter of fiscal year 2001. This decrease was
attributable to a reduction in advertising expenditures and lower distribution
costs resulting from lower wholesale production, partially offset by an increase
in healthcare costs and higher occupancy, delivery, and warehousing costs
associated with the addition of 9 new Ethan Allen-owned stores since December of
2000.
Operating income for the three months ended December 31, 2001 was $33.2
million or 14.9% of net sales compared to $36.9 million or 15.8% of net sales
for the three months ended December 31, 2000. Operating income decreased $3.7
million or 10.0% primarily due to lower wholesale sales volume, partially offset
by higher retail volume and a price increase effective April 2001 combined with
a reduction in operating expenses noted above.
Total wholesale operating income for the second quarter of fiscal year
2002 was $24.5 million or 15.5% of net sales compared to $28.2 million or 15.7%
of net sales in the second quarter of fiscal year 2001. Wholesale operating
income decreased $3.7 million or 13.1% this quarter due to lower wholesale sales
caused by softening demand, partially offset by a price increase effective April
2001, reduced advertising expenditures, and lower distribution costs.
Operating income for the retail segment increased by $1.1 million for
the three months ended December 31, 2001 to $7.7 million or 6.6% of net sales
from $6.6 million or 6.1% of net sales for the three months ended December 31,
2000. The increase in retail operating income was primarily attributable to the
addition of 9 new stores since December 2000 and to a reduction in operating
costs at existing retail locations.
Interest and other miscellaneous income of $1.0 million increased $0.6
million over the prior year second quarter primarily due to proceeds received
from the sale of real property.
Income tax expense of $12.9 million was recorded for the three months
ended December 31, 2001 as compared to $14.0 million for the same period in the
prior year. The Company's effective tax rate was 37.8% in the current year and
prior year second quarter.
-12-
For the three months ended December 31, 2001, the Company recorded net
income of $21.2 million, a decrease of 8.2%, compared to $23.1 million for the
three months ended December 31, 2000. Earnings per diluted share of $0.53
decreased 8.6% or $0.05 per diluted share in the quarter from $0.58 per diluted
share in the prior year quarter.
SIX MONTHS ENDED DECEMBER 31, 2001 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 2000
Consolidated revenue for the six months ended December 31, 2001
decreased by $14.3 million or 3.2% to $429.6 million from $443.9 million for the
six months ended December 31, 2000. Sales were negatively impacted during the
last six months from slowing demand caused by a weaker economy.
Wholesale revenue for the six month period in fiscal year 2002
decreased by $28.2 million or 8.3% to $313.1 million from $341.3 million in the
six month period of fiscal year 2001 due to softening demand.
Total retail revenue from Ethan Allen-owned stores for the six months
ended December 31, 2001 increased by $8.5 million or 4.1% to $215.8 million from
$207.3 million for the six months ended December 31, 2000. The increase in
retail sales was attributable to greater sales generated by newly opened or
acquired stores of $21.3 million, partially offset by a decrease in comparable
store sales of $9.9 million, or 4.8%, and by a decrease from closed stores,
which generated $2.1 million less sales in fiscal year 2002 as compared to
fiscal year 2001. The prior year six months ended December 2000 also included a
gain of $0.8 million on the sale of a company-owned retail store to an
independent dealer. Of the stores acquired during the six months ended December
31, 2001, 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 first half of fiscal year 2002 were lower than
the prior year by 3.9%. Booked orders include wholesale orders and written
business of company-owned retail stores. Wholesale orders for the twenty
seven-week period were down 5.4% compared to a twenty six-week period in the
prior year. Orders for company-owned stores were up 2.1% and comparable Ethan
Allen-owned store orders were down 7.0% using the six-month period in the
current and prior year.
For the first half of fiscal year 2002, gross profit decreased $10.1
million to $197.3 million from $207.4 million in the first half of the prior
fiscal year. Gross profit decreased from lower wholesale sales volume, partially
offset by a price increase effective April 2001. Consolidated gross margin was
45.9% for the six months ending December 31, 2001 compared to 46.7% in the
comparable prior year period principally from lower wholesale production caused
by softening demand. Wholesale gross margin was also impacted by the production
of more affordably priced products manufactured at lower margins.
Operating expenses increased $0.3 million or 0.2% to $137.6 million or
32.0% of net sales in the current six months as compared to $137.3 million or
30.9% of net sales for the first six months of fiscal year 2001. This increase
was attributable to greater healthcare costs and higher occupancy, delivery and
warehousing costs associated with the addition of 9 new Ethan Allen-owned stores
since December of 2000, partially offset by a reduction in advertising
expenditures and lower distribution costs resulting from lower wholesale
production.
Operating income for the six months ended December 31, 2001 was $59.7
million or 13.9% of net sales compared to $70.2 million or 15.8% of net sales
for the six months ended December 31, 2000. Operating income decreased $10.5
million or 15.0% primarily due to lower wholesale sales volume, partially offset
by the price increase effective April 2001, the production of more affordably
priced products at lower margins, and higher operating costs due to the growth
of the retail segment.
Total wholesale operating income for the first half of fiscal year 2002
was $47.7 million or 15.2% of net sales compared to $54.4 million or 15.9% of
net sales in the first half of fiscal year 2001. Wholesale operating income
decreased $6.7 million or 12.3% in the last six 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.
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Operating income for the retail segment decreased by $1.9 million for
the six months ended December 31, 2001 to $10.7 million or 5.0% of net sales
from $12.6 million or 6.1% of net sales for the six months ended December 31,
2000. The decrease in retail operating income was principally due to higher
retail operating expenses related to the addition of 9 new stores since December
2000, partially offset by a reduction in operating costs at existing retail
locations.
Interest and other miscellaneous income of $1.6 million increased $0.9
million over the prior year first half primarily due to proceeds received from
the sale of real property and from an increase in interest income from higher
cash investments.
Income tax expense of $23.0 million was recorded for the six months
ended December 31, 2001 as compared to $26.6 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 six months ended December 31, 2001, the Company recorded net
income of $37.9 million, a decrease of 13.5%, compared to $43.8 million for the
six months ended December 31, 2000. Earnings per diluted share of $0.95
decreased 12.8% or $0.14 per diluted share in the current six months from $1.09
per diluted share in the prior year.
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 $64.3 million for the six months ended
December 31, 2001 as compared to $48.7 million for the six months ended December
31, 2000. The increase of $15.6 million in net cash provided by operating
activities principally resulted from lower inventory and accounts receivable
balances during the six months ended December 31, 2001 as compared to the same
period in the prior year. Temporary plant shutdowns during the last six months
helped to manage inventory levels.
During the six months ended December 31, 2001, capital spending,
exclusive of acquisitions, totaled $17.7 million as compared to $21.6 million
for the six months ended December 31, 2000. Capital expenditures made during the
current six 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 $35.0
million. The Company expects to incur 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.
Net cash used in financing activities of $22.8 million increased by
$11.3 million due to the repurchase of the Company's common stock during the six
months ended December 31, 2001. Total debt outstanding at December 31, 2001 was
$9.4 million. At December 31, 2001, there were no revolving loans outstanding.
The Company had $19.2 million of trade and standby letters of credit
outstanding, leaving $105.8 million available under its revolving credit
facility at December 31, 2001.
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 six months ended December 31, 2001 and 2000, the Company repurchased the
following shares of its common stock (excluding retirements):
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Six Months Ended
December 31,
2001 2000
----------- ----------
Cost to repurchase common shares $20,780,785 $428,689
Common shares repurchased 734,217 15,689
Average price per share $28.30 $27.32
The Company funded its common stock repurchases through available cash
and cash from operations. As of December 31, 2001, the Company had a remaining
Board authorization to purchase 2,000,000 shares of common stock.
As of December 31, 2001, 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 December 31, 2001, the Company had working capital of
$180.2 million and a current ratio of 2.86 to 1.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
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. Although the Company did not have any revolving loans outstanding
under the Credit Agreement as of December 31, 2001, the Company had $0.1 million
of short term debt outstanding and $9.3 million of total long term debt
outstanding.
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 instruments
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
There has been no change to matters discussed in Description and
Ownership of Capital Stock in the Company's Form 10-K as filed with the
Securities and Exchange Commission on September 17, 2001.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual shareholders' meeting held on November 15, 2001, the
following proposals were submitted to a vote:
1. The election of three directors to a term expiring in 2003;
Clinton A. Clark (votes for 35,814,880, votes against -0-,
withheld 293,373), Kristin Gamble (votes for 35,826,285, votes
against -0-, withheld 281,968), and Edward H. Meyer (votes for
34,978,627, votes against -0-, withheld 1,129,626). The terms
of M. Farooq Kathwari and Horace G. McDonell will continue
until the annual shareholders meeting in 2002. The terms of
William B. Sprague and Frank G. Wisner will continue until the
annual shareholders meeting in 2003.
2. Ratification of the appointment of KPMG LLP as independent
auditors for fiscal year 2002 (votes for 35,909,221, votes
against 163,456, withheld 35,576).
ITEM 5. - OTHER INFORMATION
None.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
None.
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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: 02/07/02 BY: /s/ M. Farooq Kathwari
----------------- -----------------------------------
M. Farooq Kathwari
Chairman of the Board
President and Chief
Executive Officer
(Principal Executive Officer)
DATE: 02/07/02 BY: /s/ Edward D. Teplitz
----------------- ------------------------------------
Edward D. Teplitz
Vice President, Finance
(Principal Financial Officer)
DATE: 02/07/02 BY: /s/ Michele Bateson
----------------- ------------------------------------
Michele Bateson
Corporate Controller
(Principal Accounting Officer)
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