Business context and reporting period
Ethan Allen Interiors Inc. designs, manufactures, sources, and sells home furnishings through wholesale and company-operated retail operations, alongside a network of independent design centers. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2012 (fiscal 2013); comparisons are with the corresponding 2011 periods. The company operated 149 of 305 design centers in its global network at quarter-end.
Financial results and liquidity
| Metric | Three months ended Dec. 31 | Six months ended Dec. 31 |
|---|---|---|
| Net sales | $191.3 million, up 4.4% | $378.7 million, up 2.8% |
| Gross profit / margin | $104.0 million / 54.4%, versus $98.2 million / 53.6% | $208.2 million / 55.0%, versus $196.1 million / 53.3% |
| Operating income / margin | $17.4 million / 9.1%, versus $13.9 million / 7.6% | $35.3 million / 9.3%, versus $27.6 million / 7.5% |
| Net income | $9.8 million, versus $8.1 million | $19.9 million, versus $14.8 million |
| Diluted EPS | $0.34, versus $0.28 | $0.68, versus $0.51 |
Cash flow and liquidity: Six-month operating cash flow was $18.2 million, up from $11.0 million. Investing activities used $21.3 million, including $13.6 million of capital expenditures and net purchases of marketable securities; financing activities used $19.4 million, largely reflecting $19.6 million of dividends. Cash and cash equivalents declined to $57.3 million from $79.7 million at June 30, 2012; marketable securities were $17.9 million and restricted cash and investments were $15.4 million. Working capital was $132.6 million and the current ratio was 2.14 at December 31.
Debt: Total debt was $155.3 million, including $153.0 million of 5.375% Senior Notes due September 2015. The company had no revolving borrowings and reported $49.4 million available under its $50 million asset-based credit facility. It was in compliance with debt covenants.
Material changes versus prior periods
- Retail sales rose 6.1% in the quarter and 5.8% for the six months; retail operating income improved to $6.0 million and $7.1 million, respectively, from losses of $2.5 million and $4.0 million.
- Wholesale sales increased 1.4% in the quarter but fell 1.5% for the six months. Wholesale operating income declined to $8.9 million in the quarter from $15.7 million, and to $24.9 million for the six months from $31.4 million. Management cited lower production, fewer prototype orders, and higher imported-product costs.
- Higher retail margins, improved pricing and efficiencies, and a greater retail share of consolidated sales supported overall gross-margin expansion. SG&A rose to $86.6 million for the quarter and $172.9 million for the six months, mainly due to higher sales-related costs, real estate, and international expansion.
- Compared with June 30, 2012, total assets fell to $615.4 million from $644.8 million, while total liabilities declined to $289.7 million from $322.9 million. Inventory fell to $142.4 million from $155.7 million.
Outlook, commentary, risks, and unusual items
Management described the home furnishings market as competitive and still in a slow recovery, citing economic uncertainty, consumer-spending conditions, and pricing pressure. It remained cautiously optimistic, with plans to develop design solutions and retail locations, use technology and targeted marketing, expand internationally, and maintain a mix of domestic manufacturing and imports. Management stated that operating cash flow and other liquidity sources should be adequate for debt service, capital expenditures, and working-capital needs; it provided no specific earnings or sales forecast.
Hurricane Sandy affected 28 company design centers and eight independent retailer locations and, according to management, negatively affected written orders, delivered sales, and manufacturing margins in the quarter. Other risks identified include demand and economic changes, raw-material and transportation costs, supplier disruptions, competition, and execution of retail expansion. The filing reported no material changes to previously disclosed risk factors or market risks.
The company paid $19.6 million in dividends during the six-month period, including a $0.41-per-share special dividend and an accelerated quarterly dividend; management said the timing was intended to provide shareholders an opportunity for favorable 2012 tax treatment. It expected to continue quarterly dividends as economic conditions and liquidity permit. A $1.6 million impairment was recorded on assets held for sale. The company disclosed ongoing U.S. tax audits for 2006–2010, but did not anticipate significant changes in uncertain tax benefits. Environmental matters were described as adequately reserved; product warranty liability was $0.9 million. A consumer-credit program agreement includes potential responsibilities if participating independent retailers default, though the company believed the obligation would expire without requiring funding.
Important facts for investors to verify
- Whether retail growth and improved margins continue, and whether wholesale profitability recovers after the quarter’s margin decline.
- How written orders, comparable design-center business, and deliveries trend after Hurricane Sandy and changes in promotional activity.
- Cash generation relative to dividends, capital spending, and the $153.0 million Senior Notes maturity in 2015.
- Progress and costs associated with international expansion, manufacturing investment, and the company’s stated sourcing strategy.
- Developments in tax audits, environmental matters, warranty claims, and the consumer-credit program guarantee exposure.