Ethan Allen Interiors Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2014, the first quarter of fiscal 2015. Comparisons are with the three months ended September 30, 2013 unless otherwise noted. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Ethan Allen designs, manufactures, sources, distributes, and retails home furnishings and accents through wholesale and company-operated retail segments, as well as independent design centers. It reported approximately 300 design centers and said it manufactures about 70% of its products in North America. During the quarter, new products began shipping, retail locations had elevated clearance activity, and design-center renovations were underway.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $190.7 | $181.7 | +5.0% |
| Gross profit / margin | $104.8 / 55.0% | $98.7 / 54.4% | Margin +0.6 percentage points |
| Operating income / margin | $20.5 / 10.7% | $15.9 / 8.8% | +28.4% |
| Net income | $11.9 | $9.0 | +31.5% |
| Diluted EPS | $0.41 | $0.31 | +$0.10 |
| Operating cash flow | $6.8 | $21.1 | Down $14.3 |
- Wholesale sales increased 10.1% to $124.6 million; segment operating income rose to $21.5 million from $16.1 million, and its operating margin improved to 17.3% from 14.3%.
- Retail sales increased 2.3% to $145.0 million. Retail operating income was $1.8 million versus a $0.2 million loss. Written orders declined 0.7%, while comparable written orders increased 0.8%.
- SG&A rose 1.9% to $84.3 million, but declined as a share of sales to 44.2% from 45.6%. The effective tax rate was 36.6%, compared with 36.2%.
- Operating cash flow was pressured by working-capital use, particularly inventory and trade payables. Inventories increased to $157.5 million from $146.3 million at June 30, 2014. Capital expenditures were $5.4 million; acquisitions used $2.0 million.
Liquidity, debt, and capital
- At September 30, 2014, cash and cash equivalents were $114.3 million, marketable securities $12.9 million, and restricted cash and investments $8.0 million. Unrestricted cash plus marketable securities totaled $127.2 million.
- Total debt was $131.1 million, including $129.3 million of 5.375% Senior Notes due October 1, 2015. The company reported $49.4 million of availability under its then-existing revolving facility and no revolving borrowings.
- Working capital was $179.2 million; the current ratio was 2.24 to 1. Shareholders’ equity was $375.2 million.
- Cash dividends paid were $2.9 million. The company said the quarterly dividend was increased to $0.12 per share payable in October 2014 and expected to continue dividends as economic conditions and liquidity permit. No shares were repurchased during the quarter.
Outlook, risks, and notable items
- Management described its outlook as “cautiously optimistic,” citing new products, marketing, design services, technology, potential design-center expansion, and international growth. It provided no specific numerical forecast.
- Management expects operating cash flow to be sufficient for anticipated capital expenditures and believes available liquidity and refinancing alternatives will cover debt service, working capital, and other needs.
- On October 21, 2014, after quarter-end, the company entered a five-year, $150 million secured facility: up to $100 million revolving and a delayed-draw term loan of up to $50 million. The term loan may be drawn through April 21, 2015, subject to repayment of the Senior Notes substantially concurrently. The company intended to use the facility, in part, to refinance those notes.
- The new facility includes fixed-charge-coverage and availability-related conditions and customary restrictions, including on dividends and other restricted payments. Management reported a 1.5-to-1 fixed charge coverage ratio at September 30, 2014.
- Management cited competitive and pricing pressure, consumer confidence and discretionary spending, sourcing and raw-material costs, weather, supplier disruptions, and other economic and operational factors as risks. The company reported U.S. tax audits covering 2006–2012; it did not expect changes in uncertain tax benefits from those audits to be significant, though resolutions could affect the effective tax rate.
- A $1.9 million loss on disposal of property, plant and equipment was included among operating-cash-flow adjustments; the company also reported $3.3 million of disposal proceeds. Management said litigation and environmental matters were not expected to have a material adverse effect. No material changes to previously reported risk factors or market risks were noted.
Most important facts for investors to verify
- Progress and final terms of refinancing the $129.3 million Senior Notes due October 2015, including whether and when the new facility’s term loan is drawn.
- Whether the improvement in margins and retail profitability continues after clearance activity, product launches, and design-center renovations.
- Cash conversion and working-capital trends, especially inventory growth, given operating cash flow fell to $6.8 million from $21.1 million.
- Retail demand indicators: written orders declined overall, comparable written orders rose modestly, and backlog remained below the prior-year level.
- Effects of the new facility’s covenants and debt costs on refinancing capacity, dividends, and other uses of cash.