Ethan Allen Interiors Inc. — Form 10-Q
Business context and reporting period. The filing covers the fiscal second quarter and first six months ended December 31, 2013; comparative periods ended December 31, 2012. The company designs, manufactures, sources, and sells home furnishings through wholesale and company-operated retail segments, alongside a network of independent retailers. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2013 | Six months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Net sales | $193.1 | $191.3 | $374.8 | $378.7 |
| Gross profit | $106.0 | $104.0 | $204.7 | $208.2 |
| Gross margin | 54.9% | 54.4% | 54.6% | 55.0% |
| Operating income | $19.9 | $17.4 | $35.8 | $35.3 |
| Operating margin | 10.3% | 9.1% | 9.6% | 9.3% |
| Net income | $11.6 | $9.8 | $20.6 | $19.9 |
| Diluted EPS | $0.39 | $0.34 | $0.70 | $0.68 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $22.6 | $18.2 |
- Quarterly segment performance: Wholesale sales rose 4.6% to $113.1 million; wholesale operating income increased to $14.4 million from $8.9 million. Retail sales slipped 0.2% to $151.5 million; retail operating income declined to $4.2 million from $6.0 million. Segment sales include intercompany sales and therefore do not sum to consolidated sales.
- Six-month segment performance: Wholesale sales increased 3.1% to $226.3 million, while retail sales decreased 2.5% to $293.3 million. Wholesale operating income rose to $30.5 million from $24.9 million; retail operating income fell to $4.0 million from $7.1 million.
- Cash flow and investment: Six-month investing cash use was $12.1 million, including $8.6 million of capital expenditures and net purchases of marketable securities. Financing cash use was $5.5 million, including $5.5 million of dividends. Cash and cash equivalents increased $5.0 million over the six months.
Liquidity, debt, and balance sheet
- At December 31, 2013, cash and cash equivalents were $77.6 million, marketable securities $20.2 million, and restricted cash and investments $14.9 million. Total current assets were $270.0 million and current liabilities $124.1 million; working capital was $145.9 million and the current ratio was 2.18.
- Total debt was $131.1 million, principally $129.2 million of 5.375% Senior Notes, plus $1.9 million of capital leases and other debt. The company reported $49.4 million of remaining availability under its $50 million asset-based credit facility, with no revolving borrowings, and stated it was in compliance with debt covenants.
- The Senior Notes mature in 2015. The filing gives the maturity as October 1, 2015 in the debt note and September 2015 in the MD&A; investors should verify the precise date.
- In January 2014, $6 million of restricted cash tied to the private-label credit card program was released into operating cash following an agreement amendment.
Changes, outlook, and risks
- Quarterly consolidated sales increased 1.0%, while six-month sales decreased 1.0%. Quarterly margin and earnings improvements were driven primarily by stronger wholesale performance. For the six-month period, lower retail sales and retail margin reduced gross profit, partly offset by lower operating expenses.
- Retail written orders fell 4.0% in the quarter, including a 1.8% decline at comparable design centers; for the first six months, written orders increased 4.2%, with comparable-center orders up 6.6%. Retail backlog was 14% above the prior-year level at December 31. Wholesale backlog was described as significantly higher than a year earlier.
- Management described the industry as recovering slowly, highly competitive, and promotional, and remained “cautiously optimistic.” It expected operating cash flow and other liquidity sources, including refinancing alternatives, to fund debt service, planned capital expenditures, and working capital. No numerical earnings or sales guidance was provided. The company expected recently opened Montreal and Belgium retail locations to reach breakeven by fiscal year-end 2014.
- Management cited the government shutdown, consumer confidence, bad weather, and delays in imported products as factors weighing on quarterly retail orders or deliveries. Risks include economic and consumer-spending uncertainty, possible renewed U.S. debt-ceiling or government-shutdown concerns, competition and pricing pressure, input and transportation costs, weather and supply disruptions, and costs of conflict-minerals compliance.
- The company extended its third-party consumer credit program through July 2019, subject to automatic one-year renewals unless terminated. It may be required to provide up to $12 million of collateral if specified covenants are not met; the $6 million then restricted was released in January 2014. The company also provides certain performance assurances for participating independent retailers, with potential payments described as indeterminable and recourse against retailers.
- Routine litigation and environmental matters were disclosed; management considered a material adverse outcome from existing claims or proceedings remote. Product warranty liability was $0.9 million. U.S. tax audits covered 2006–2011; management did not expect changes in uncertain tax benefits over the next twelve months to be significant, though resolutions may affect the effective tax rate.
- The company reported effective disclosure controls, no material changes in internal control during the quarter, and no material change in market-risk disclosures or legal proceedings from its prior annual report.
Important facts for investors to verify
- Whether the 14% retail backlog increase converts into deliveries and sales, particularly given the quarterly decline in written orders.
- The sustainability of wholesale margin and operating-income gains, alongside continued weakness in retail profitability.
- Refinancing plans and timing for the $129.2 million Senior Notes due in 2015; verify the maturity date discrepancy in the filing.
- Future collateral requirements and contingent exposure under the extended consumer credit program, and whether the released $6 million remains available for operations.
- Potential effects of tax-audit resolutions, economic and consumer-demand conditions, and new conflict-minerals compliance costs.