ETHAN ALLEN INTERIORS INC - Quarter Report: 2010 March (Form 10-Q)

Table of Contents

 

 

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 March 31, 2010

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                      to

 

Commission File Number:  1-11692

 

Ethan Allen Interiors Inc.

(Exact name of registrant as specified in its charter)

 

 

 

(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 o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).   o Yes o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

At April 30, 2010, there were 29,114,424 shares of Class A Common Stock,

par value $.01, outstanding.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

Item		Page
Part I — Financial Information
1.	Financial Statements as of March 31, 2010 (unaudited) and June 30, 2009 and for the three and nine months ended March 31, 2010 and 2009 (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
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
3.	Quantitative and Qualitative Disclosures About Market Risk	39
4.	Controls and Procedures	39
Part II - Other Information
1.	Legal Proceedings	39
1A.	Risk Factors	39
2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
3.	Defaults Upon Senior Securities	39
5.	Other Information	40
6.	Exhibits	40
	Signatures	41

 

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PART I - FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)

 

		March 31, 2010			June 30, 2009
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	71,925		$	52,960
Marketable securities		2,023			—
Accounts receivable, less allowance for doubtful accounts of $1,122 at March 31, 2010 and $1,362 at June 30, 2009		15,725			13,086
Inventories (note 6)		140,369			156,519
Prepaid expenses and other current assets		12,163			21,060
Deferred income taxes		16,442			8,077
Total current assets		258,647			251,702
Property, plant and equipment, net		310,578			333,599
Goodwill and other intangible assets (notes 8 and 9)		45,128			45,128
Other assets		18,733			16,056
Restricted cash and investments		11,300			—
Total assets		$	644,386		$	646,485
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt (note 10)		$	43		$	42
Customer deposits		49,278			31,691
Accounts payable		23,862			22,199
Accrued compensation and benefits		25,888			29,533
Accrued expenses and other current liabilities (note 7)		29,754			28,998
Total current liabilities		128,825			112,463
Long-term debt (note 10)		203,194			203,106
Other long-term liabilities		23,817			24,993
Total liabilities		355,836			340,562
Shareholders’ equity:
Class A common stock, par value $.01, 150,000,000 shares authorized; 48,346,570 shares issued at March 31, 2010 and 48,334,870 shares issued at June 30, 2009		483			483
Class B common stock, par value $.01, 600,000 shares authorized; no shares issued and outstanding at March 31, 2010 and June 30, 2009		—			—
Preferred stock, par value $.01, 1,055,000 shares authorized; no shares issued and outstanding at March 31, 2010 and June 30, 2009		—			—
Additional paid-in capital		358,104			356,446
		358,587			356,929
Less: Treasury stock (at cost), 19,232,146 shares at March 31, 2010 and 19,380,941 shares at June 30, 2009		(578,742		)	(583,220		)
Retained earnings		507,335			531,747
Accumulated other comprehensive income (note 14)		1,370			467
Total shareholders’ equity		288,550			305,923
Total liabilities and shareholders’ equity		$	644,386		$	646,485

 

See accompanying notes to consolidated financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands, except per share data)

 

		Three months ended March 31,						Nine months ended March 31,
		2010			2009			2010			2009
Net sales		$	147,258		$	140,221		$	426,750		$	535,620
Cost of sales		75,231			74,171			227,390			255,828
Gross profit		72,027			66,050			199,360			279,792
Operating expenses:
Selling		37,321			42,251			109,541			146,274
General and administrative		37,129			42,781			112,024			131,806
Goodwill impairment (note 9)		—			48,400			—			48,400
Restructuring and impairment charge , net (note 7)		400			7,325			1,989			5,721
Total operating expenses		74,850			140,757			223,554			332,201
Operating income (loss)		(2,823		)	(74,707		)	(24,194		)	(52,409		)
Interest and other miscellaneous income, net		894			806			2,711			3,019
Interest and other related financing costs (note 10)		2,979			2,985			8,938			8,818
Income (loss) before income taxes		(4,908		)	(76,886		)	(30,421		)	(58,208		)
Income tax expense (benefit) (note 3)		(4,053		)	(28,212		)	(12,649		)	(22,444		)
Net income (loss)		$	(855	)	$	(48,674	)	$	(17,772	)	$	(35,764	)
Per share data (note 13):
Basic earnings per common share:
Net income (loss) per basic share		$	(0.03	)	$	(1.69	)	$	(0.61	)	$	(1.24	)
Basic weighted average common shares		29,016			28,861			28,953			28,768
Diluted earnings per common share:
Net income (loss) per diluted share		$	(0.03	)	$	(1.69	)	$	(0.61	)	$	(1.24	)
Diluted weighted average common shares		29,016			28,861			28,953			28,768

 

See accompanying notes to consolidated financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		Nine Months Ended
		March 31,
		2010			2009
Operating activities:
Net income (loss)		$	(17,772	)	$	(35,764	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		23,849			19,285
Compensation expense related to share-based awards		1,658			1,357
Provision (benefit) for deferred income taxes		(11,762		)	(18,865		)
Goodwill impairment		—			48,400
Restructuring and impairment charge (benefit), net		(230		)	(1,124		)
Loss (gain) on disposal of property, plant and equipment		22			758
Other		162			168
Change in assets and liabilities, net of the effects of acquired businesses:
Accounts receivable		(2,639		)	1,974
Inventories		16,150			12,784
Prepaid and other current assets		6,340			1,945
Other assets		531			764
Customer deposits		17,587			(16,457		)
Accounts payable		1,663			(6,413		)
Accrued expenses and other current liabilities		(695		)	4,021
Other long-term liabilities		(1,263		)	960
Net cash provided by operating activities		33,601			13,793
Investing activities:
Proceeds from the disposal of property, plant & equipment		10,256			6,283
Capital expenditures		(7,611		)	(20,466		)
Acquisitions		—			(741		)
Increase in restricted cash and investments		(11,300		)	—
Purchase of marketable securities		(2,023		)	—
Other		25			(147		)
Net cash provided by (used in) investing activities		(10,653		)	(15,071		)
Financing activities:
Payments on long-term debt		(31		)	(31		)
Proceeds from issuance of common stock		—			2
Payment of deferred financing costs		(199		)	(447		)
Payment of cash dividends		(4,345		)	(20,720		)
Net cash used in financing activities		(4,575		)	(21,196		)
Effect of exchange rate changes on cash		592			(743		)
Net increase (decrease) in cash & cash equivalents		18,965			(23,217		)
Cash & cash equivalents - beginning of period		52,960			74,376
Cash & cash equivalents - end of period		$	71,925		$	51,159

 

See accompanying notes to consolidated financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

 Nine months ended March 31, 2010

(Unaudited)

(In thousands, except share data)

 

		Common  Stock			Additional  Paid-In  Capital			Treasury  Stock			Accumulated  Other  Comprehensive  Income			Retained  Earnings			Total
Balance at June 30, 2009		$	483		$	356,446		$	(583,220	)	$	467		$	531,747		$	305,923
Share-based compensation expense (note 12)		—			1,658			—			—			—			1,658
Issuance of treasury shares for 401k company match		—			—			4,478			—			(2,275		)	2,203
Dividends declared on common stock		—			—			—			—			(4,365		)	(4,365		)
Other comprehensive income (note 14):
Currency translation adjustments		—			—			—			866			—			866
Hedge amortization, net of tax and other		—			—			—			37			—			37
Net income (loss)		—			—			—			—			(17,772		)	(17,772		)
Total comprehensive income (loss)																	(16,869		)
Balance at March 31, 2010		$	483		$	358,104		$	(578,742	)	$	1,370		$	507,335		$	288,550

 

See accompanying notes to consolidated financial statements.

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

(1)          Basis of Presentation and Recent Accounting Pronouncements

 

Basis of Presentation

 

Ethan Allen Interiors Inc. (“Interiors”) is a Delaware corporation incorporated on May 25, 1989. The consolidated financial statements include the accounts of Interiors, its wholly owned subsidiary Ethan Allen Global, Inc. (“Global”), and Global’s subsidiaries (collectively “We”, “Us”, “Our”, “Ethan Allen”, or the “Company”).  All intercompany accounts and transactions have been eliminated in the consolidated financial statements.  All of Global’s capital stock is owned by Interiors, which has no assets or operating results other than those associated with its investment in Global.

 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Due to the inherent uncertainty involved in making those estimates, actual results could differ from those estimates.  Areas in which significant estimates have been made include, but are not limited to, revenue recognition, the allowance for doubtful accounts receivable, inventory obsolescence, tax valuation allowances, useful lives for property, plant and equipment and intangible assets, goodwill and indefinite-lived intangible asset impairment analyses, the evaluation of uncertain tax positions and the fair value of assets acquired and liabilities assumed in business combinations.

 

Recently Adopted Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance now codified as FASB Accounting Standards Codification (“ASC”) Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP.  ASC Topic 105 does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the ASC will be considered non-authoritative. These provisions of ASC Topic 105 became effective for the Company in the first quarter of fiscal 2010. The adoption of this pronouncement did not have an impact on the Company’s financial condition or results of operations, but will impact our financial reporting process by eliminating all references to pre-codification standards. On the effective date of this Statement, the ASC superseded all then-existing non-SEC accounting and reporting standards, and all other non-grandfathered non-SEC accounting literature not included in the ASC became non-authoritative. References to the pre-codification pronouncements are noted in parenthesis.

 

In September 2006, FASB issued guidance now codified as ASC Topic 820, “Fair Value Measurements and Disclosures,” (SFAS No. 157) which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements and does not require any new fair value measurements.   In February 2008, the FASB released additional ASC Topic 820 guidance (FSP No. 157-2), which delayed the effective date of the application of certain guidance related to non-financial assets and non-financial liabilities until July 1, 2009 for the Company, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company adopted certain provisions of ASC Topic 820 effective July 1, 2008, except as it relates to those non-financial assets and non-financial liabilities excluded as noted above.  The Company adopted the provisions of ASC Topic 820 with respect to our non-financial assets and non-financial liabilities effective July 1, 2009. The implementation of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

In December 2007, the FASB issued guidance now codified as ASC Topic 805, “Business Combinations” (SFAS No. 141(R), which replaced SFAS No. 141).  ASC Topic 805 establishes principles and requirements for how an acquirer

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC Topic 805 is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008 (July 1, 2009 for the Company). The impact of this Statement on the Company’s financial position, results of operations and cash flows will be dependent on the terms, conditions and details of such acquisitions.

 

In June 2008, the FASB issued guidance now codified as ASC Topic 260, “Earnings Per Share” (EITF 03-6). Under ASC Topic 260, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing earnings per share. The implementation of this pronouncement did not have a material impact on our consolidated financial position, results of operations or cash flows.

 

(2)           Interim Financial Presentation

 

In our opinion, all adjustments, consisting only of normal recurring adjustments necessary for fair presentation, have been included in the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of results that may be expected for the entire fiscal year. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K/A for the year ended June 30, 2009. Certain prior period amounts have been reclassified in order for them to conform to the current year’s presentation.

 

(3)           Income Taxes

 

The Company reviews its expected annual effective income tax rates and makes changes on a quarterly basis as necessary based on certain factors such as changes in forecasted annual operating income; changes to actual or forecasted permanent book to tax differences; impacts from future tax audits with state, federal or foreign tax authorities; or impacts from tax law changes.  The Company identifies items which are not normal and are nonrecurring in nature and treats these as discrete events. The tax effect of discrete items is recorded in the quarter in which the discrete events occur. Due to the volatility of these factors, the Company’s consolidated effective income tax rate can change significantly on a quarterly basis.

 

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  All of the unrecognized tax benefits, if recognized, would be recorded as a benefit to income tax expense. Our continuing practice is to recognize interest and penalties related to income tax matters as a component of income tax expense.

 

The Company’s consolidated effective tax rate was 82.6% and 36.7% for the three months ended March 31, 2010 and 2009 respectively, and 41.6% and 38.6% for the nine months ended March 31, 2010 and 2009, respectively. In the current quarter, the effective tax rate is related to the tax benefit on the current quarter loss and the expiration of certain statutes of limitation causing certain unrecognized tax benefits to be recognized.  The tax benefit is partially offset by the foreign valuation allowance on the Canadian net operating losses, by state valuation allowance on certain state net operating losses and by state income tax expense in states where the Company’s subsidiaries file on a separate company basis.

 

The Company conducts business globally and, as a result, the Company or one or more of its subsidiaries files income tax returns in the U.S., various state, and foreign jurisdictions. In the normal course of business, the

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Company is subject to examination by the taxing authorities in such major jurisdictions as Canada, Mexico and the U.S. As of March 31, 2010, certain subsidiaries of the Company are currently under audit from 2001 through 2007 in the U.S. It is reasonably possible that some of these audits may be completed during the next twelve months. While the amount of uncertain tax benefits with respect to the entities and years under audit may change within the next twelve months, it is not anticipated that any of the changes will be significant.

 

A valuation allowance must be established for deferred tax assets when it is more likely than not that they will not be realized. As of March 31, 2010, the Company continues to maintain a valuation allowance for the state deferred tax assets and Canadian net operating losses in its Retail segment. After considering both positive and negative evidence, management’s assessment is that a valuation allowance is not needed for the Company’s other deferred tax assets.  Due to the economic times and recent losses, management will continue to assess the realizability of the tax assets based on actual and forecasted operating results on a quarterly basis, as required under ASC topic 740.  It is possible during the current fiscal year, that the realization of tax assets is not reasonably assured due to a lack of available objective evidence.  Management would then record a valuation allowance against the tax assets which would result in a non-cash charge to earnings.

 

(4)           Restricted Cash and Investments

 

During the quarter ended March 31, 2010, we transferred $11.3 million of cash into a restricted account.  The restricted cash, maintained as security for our workmen’s compensation and other insurance liabilities, previously was secured by a letter of credit.  The restricted funds, which can be invested by us in money market mutual funds, and U.S. Treasuries and U.S. Government agency fixed income instruments with maturities of two years or less, cannot be withdrawn from our account without the prior written consent of the secured party.  These restricted funds are classified as long-term assets because they are not expected to be used within one year to fund operations.  At March 31, 2010, the restricted cash was pledged for the purchase of U.S. municipal bonds with a settlement date of April 12, 2010, are callable, and mature in two years.  The balance is carried at cost, which approximates market value.  See also Note 15, “Financial Instruments”.

 

(5)           Marketable Securities

 

The Company’s investments are classified as either available-for-sale or held-to-maturity at the time of purchase, and reassessed as of each balance sheet date.  Our marketable securities consist of available-for-sale securities, and are marked-to-market based on prices provided by our investment advisors, with unrealized gains and temporary unrealized losses, when material, reported as a component of other comprehensive income, net of tax until realized.  When realized, the Company recognizes gains and losses on the sales of the securities on a specific identification method and includes the realized gains or losses in other income, net, in the consolidated statements of operations.  The Company includes interest, dividends, and amortization of premium or discount on securities classified as available-for-sale in other income, net in the consolidated statements of operations.  We also evaluate our available-for-sale securities to determine whether a decline in fair value of a security below the amortized cost basis is other than temporary.  Should the decline be considered other than temporary, we write down the cost of the security and include the loss in earnings. In making this determination we consider such factors as the reason for and significance of the decline, current economic conditions, the length of time for which there has been an unrealized loss, the time to maturity, and other relevant information.  Available-for-sale securities are classified as either short-term or long-term based on management’s intention of when to sell the securities.

 

At March 31, 2010, the Company held $2.0 million of marketable securities consisting of $0.2 million in U.S. municipal bonds with maturities of less than one year and $1.8 million in U.S. municipal bonds with maturities of less than two years.  There have been no material unrealized gains or losses recorded in other comprehensive income, and no realized gains or losses as of March 31, 2010.  Based on discussions with our investment advisors, we

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

do not believe there are any impairments considered to be other than temporary at March 31, 2010.  Also see Note 4, “Restricted Cash and Investments” and Note 15, “Financial Instruments”.

 

(6)           Inventories

 

Inventories at March 31, 2010 and June 30, 2009 are summarized as follows (in thousands):

 

 

Inventories are presented net of a related valuation allowance of $2.1 million at both March 31, 2010 and $2.2 million at June 30, 2009.

 

(7)           Restructuring and Impairment Charges

 

In recent years, we have announced and executed plans to consolidate our operations as part of an overall strategy to maximize efficiencies and maintain our competitive advantage.

 

In fiscal 2009, the Company consolidated several operations. Upholstery plants in Eldred, Pennsylvania and Chino, California were consolidated into the Maiden, North Carolina and Silao, Mexico operations. Sawmill and dimension mill production in Andover, Maine was transferred to the Beecher Falls, Vermont site.  Our remaining case goods plants are being converted to produce custom case goods products. Wholesale distribution locations, and several retail service centers were consolidated. For these actions, the Company estimates pre-tax restructuring, impairment, accelerated depreciation and other related charges will ultimately approximate $29 million ($23 million wholesale, $6 million retail), consisting of a $17 million impact from long-lived assets, $8 million in employee severance and other payroll and benefit costs, and $4 million in other associated costs.   In the current fiscal year, total costs were $0.2 million of restructuring credits and $6.6 million in accelerated depreciation charges for Wholesale, and $2.2 million of restructuring charges for the Retail segment. Cumulative charges to date for these actions totaling $21.2 million have been classified in the Statement of Operations as restructuring and impairment charges, and $6.6 million of accelerated depreciation was recorded in cost of sales.  Adjustments to the restructuring reserve in the current period consist primarily of increased costs for severance above initial estimates for both our wholesale and retail segments, gains on the sale of equipment sold and adjustments on non-cancellable leases.  The activity in the restructuring reserve related to these plans is presented in the following table (in thousands) and is classified with accrued expenses and other current liabilities in the Consolidated Balance Sheets.

 

Fiscal 2009 plans:

 

		Three months ended March 31, 2010
		Balance at December 31, 2009			New charges (credits)			Utilized			Adjustments			Balance at March 31, 2010
Employee severance and other payroll and benefit costs		$	638		$	—		$	(794	)	$	271		$	115
Other associated costs		1,264			187			(348		)	71			1,174
Write down of long-lived assets		—			—			69			(69		)	—
		$	1,902		$	187		$	(1,073	)	$	273		$	1,289

 

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ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

 

Fiscal 2009 plans:

 

		Nine months ended March 31, 2010
		Balance at June 30, 2009			New charges (credits)			Utilized			Adjustments			Balance at March 31, 2010
Employee severance and other payroll and benefit costs		$	3,864		$	103		$	(4,166	)	$	314		$	115
Other associated costs		654			1,564			(1,067		)	23			1,174
Write down of long-lived assets		—			54			442			(496		)	—
		$	4,518		$	1,721		$	(4,791	)	$	(159	)	$	1,289

 

In fiscal 2008, we announced a plan to consolidate the operations of certain Ethan Allen-operated retail design centers and retail service centers. In connection with this initiative, we permanently ceased operations at ten design centers and six retail service centers which, for the most part, were consolidated into other existing operations.  Costs for these actions in the current fiscal year totaled $0.4 million, all for the Retail segment, due to non-cancellable lease adjustments and net losses on the sale of real estate. Cumulative charges to date for these actions total $5.9 million, all of which have been classified in the Statement of Operations as restructuring and impairment charges of the Retail segment. Adjustments to the restructuring reserve in the current period consist primarily of adjustments on non-cancellable leases.  Activity in the Company’s restructuring reserves related to these plans is summarized in the following table (in thousands) and is classified with accrued expenses and other current liabilities in the Consolidated Balance Sheets:

 

Fiscal 2008 plans:

 

		Three months ended March 31, 2010
		Balance at December 31, 2009			New charges (credits)			Utilized			Adjustments			Balance at March 31, 2010
Employee severance and other payroll and benefit costs		$	349		$	—		$	(10	)	$	—		$	339
Other associated costs		2,462			—			(434		)	(61		)	1,967
		$	2,811		$	—		$	(444	)	$	(61	)	$	2,306

 

Fiscal 2008 plans:

 

		Nine months ended March 31, 2010
		Balance at June 30, 2009			New charges (credits)			Utilized			Adjustments			Balance at March 31, 2010
Employee severance and other payroll and benefit costs		$	369		$	—		$	(30	)	$	—		$	339
Other associated costs		2,892			68			(1,140		)	147			1,967
Write down of long-lived assets		—			—			(212		)	212			—
		$	3,261		$	68		$	(1,382	)	$	359		$	2,306

 

(8)                                 Business Acquisitions

 

There were no acquisitions completed during the nine months ended March 31, 2010.

 

In October 2008, we acquired, in a single transaction, one Ethan Allen retail design center from an independent retailer for consideration of approximately $0.3 million of cash and forgiveness of receivables.  As a result of this acquisition, we recorded additional inventory of $0.2 million and goodwill of $0.1 million.  In August 2008, we acquired in two transactions, two Ethan Allen retail design centers from independent retailers for consideration of

 

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approximately $0.6 million of cash and forgiveness of receivables, assumed customer deposits of $0.7 million and other liabilities of $0.2 million.  As a result of this acquisition, we recorded additional inventory of $0.7 million and goodwill of $0.7 million.

 

All acquisitions are subject to a contractual holdback or reconciliation period, during which the parties to the transaction may agree to certain normal and customary purchase accounting adjustments.

 

Goodwill associated with our acquisitions represents the premium paid to the seller related to the acquired business (i.e. market presence) and other fair value adjustments to the assets acquired and liabilities assumed.  Further discussion of our goodwill and other intangible assets can be found in Note 9.

 

A summary of our allocation of purchase price accounting for acquisitions during the three and nine months ended March 31, 2009 is provided below (in thousands).

 

		Three months ended March 31, 2009			Nine months ended March  31, 2009
Business segment		Retail			Retail
Total consideration		$	94		$	1,005
Fair value of assets acquired and liabilities assumed:
Inventory		3			829
PP&E and other assets		(5		)	55
Customer deposits		5			(556		)
A/P and other liabilities		100			(86		)
Goodwill		$	(9	)	$	763

 

(9)         Goodwill, Other Intangible Assets and Goodwill Impairment

 

At March 31, 2010 and June 30, 2009, we had goodwill and other indefinite-lived intangible assets of $25.4 million and $19.7 million, respectively, all of which is included in the Wholesale segment.  The indefinite-lived intangible assets represent Ethan Allen trade names.  The Company previously had goodwill in the Retail segment, all of which was considered impaired and written off during the third quarter of fiscal 2009.

 

In accordance with ASC Topic 350, “Intangibles-Goodwill and Other” (SFAS No. 142), we do not amortize goodwill or other indefinite-lived intangible assets but, rather, we conduct an annual impairment analysis of goodwill and other indefinite-lived intangible assets the first of April each fiscal year, unless events occur or circumstances change that would more likely than not reduce the fair value of the goodwill or other indefinite-lived intangible assets below their carrying value. In determining whether an interim test is appropriate, management considers several factors including changes in the Company’s stock price, financial performance, third party ratings on its long-term debt, and expected financial outlook of the business. Methods employed to value the enterprise and the Company’s retail and wholesale segments include the market approach and the income approach, which are reconciled with the total market capitalization of the Company. These valuation methods use historical revenues and cash flows, as well as Company and external analysts’ financial projections and apply discount rates, weighted average cost of capital rates, total invested capital multiples, and premium control multiples. Fair value of our trade name is valued using the relief-from-royalty method. Significant factors used in trade name valuation are royalty rates, future growth and discount rates, and expense rates.

 

The Company performed impairment evaluations during the second and third quarters of fiscal 2009 as a result of sudden and dramatic changes in the business climate and the Company’s performance, and determined as of March 31, 2009 that the $48.4 million of goodwill in the Retail segment was considered impaired and fully written off at that

 

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time.  In the fiscal quarter ended June 30, 2009, the Company performed its annual impairment test and concluded there was no additional impairment.

 

In fiscal 2010, the Company concluded for each of the first three quarters that no interim impairment test was required.  During the nine months ended March 31, 2010, although financial results were below management’s expectations, our sales, gross profit, operating income, net income, written orders, and other indicators improved from the previous quarter, and our long-term outlook has not changed significantly.  The Company’s average quarterly stock price increased 40% (from $12.11 for the quarter ended June 30, 2009, to $16.91 for the quarter ended March 31, 2010), and cash (including restricted cash) and marketable securities increased to $85.2 million at March 31, 2010 from $53.0 million at June 30, 2009.

 

There can be no assurance that the outcome of future reviews will not result in substantial impairment charges.  Impairment assessment inherently involves judgments as to assumptions about expected future cash flows and the impact of market conditions on those assumptions.  Future events and changing market conditions may impact our assumptions as to prices, costs or other factors that may result in changes in our estimates of future cash flows.  Although we believe the assumptions we use in testing for impairment are reasonable, significant changes in any of our assumptions could produce a significantly different result.

 

(10)                          Borrowings

 

Total debt obligations at March 31, 2010 and June 30, 2009 consist of the following (in thousands):

 

		March 31,			June 30,
		2010			2009
5.375% Senior Notes due 2015		$	199,118		$	198,997
Industrial revenue bonds		3,855			3,855
Other debt		264			296
Total debt		203,237			203,148
Less current maturities		43			42
Total long-term debt		$	203,194		$	203,106

 

In September 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 Global and have an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1 of each year.  We have used the net proceeds of $198.4 million to expand our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes.

 

On October 23, 2009, the Company expanded to $60 million the three-year senior secured asset-based revolving credit facility (the “Facility”) established on May 29, 2009.  The Facility provides revolving credit financing of up to $60 million, subject to borrowing base availability.  At the Company’s option, revolving loans under the Agreement bear interest at an annual rate of either:

 

(a) London Interbank Offered rate (“LIBOR”) plus 3.25% to 4.25%, based on the average availability, or

(b) the higher of (i) a prime rate, (ii) the federal funds effective rate plus 0.50%, or (iii) a LIBOR rate plus 1.00% plus, in each case, an additional 2.25% to 3.25%, based on average availability.

 

The Facility is secured by all property owned, leased or operated by the Company in the United States excluding any real property owned by the Company and contains customary covenants which may limit the Company’s

 

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ability to incur debt; engage in mergers and consolidations; make restricted payments (including dividends); sell certain assets; and make investments.

 

At March 31, 2010, we had no revolving loans, and $1.2 million in standby letters of credit outstanding under the Facility. During the quarter, the Company cancelled $11.3 million in standby letters of credit after transferring the same amount from operating cash into a restricted cash and investment account as security primarily for workmen’s compensation insurance liabilities.  Remaining availability under the revolver totaled $58.8 million subject to limitations set forth in the agreement noted above. We are in compliance with the terms and conditions of the agreement and as a result, the coverage charge ratio, or other restricted payment limitations did not apply.  As of March 31, 2010, we are in compliance with all covenants of our credit facility.

 

(11)                          Litigation

 

Environmental Matters

We and our subsidiaries are subject to various environmental laws and regulations. Under these laws, we and/or our subsidiaries are, or may be, required to remove or mitigate the effects on the environment of the disposal or release of certain hazardous materials.

 

During the fiscal year ending June 30, 2009, our liability with respect to three active sites listed, or proposed for inclusion, on the National Priorities List (“NPL”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), where we and/or our subsidiaries had been named as a Potentially Responsive Party (“PRP”) located in Southington, Connecticut; High Point, North Carolina; and Atlanta, Georgia has been resolved.

 

In each case we were not a major contributor based on the very small volume of waste generated by us in relation to total volume at those sites and were able to take part in de minimus settlement arrangements.  Specifically, with respect to the Southington site, our volumetric share was less than 1% of over 51 million gallons disposed of at the site and there were more than 1,000 PRPs.  With respect to the High Point site, our volumetric share was less than 1% of over 18 million gallons disposed of at the site and there are more than 2,000 PRPs, including more than 1,000 de minimis parties (of which we are one). With respect to the Atlanta site, a former solvent recycling/reclamation facility, our volumetric share was less than 1% of over 20 million gallons disposed of at the site by more than 1,700 PRPs.

 

In addition to the now settled actions discussed above, in July 2000, we were notified by the State of New York (the “State”) that we may be named a PRP in a separate, unrelated matter with respect to a site located in Carroll, New York.   In May, 2009, we were notified by the State that it had conducted an initial environmental study and that we have been named as a PRP.  We believe that we are not a major contributor; however, a review of the initial environmental study and our contributions, if any, is ongoing.

 

Liability under CERCLA may be joint and several. As such, to the extent certain named PRPs are unable, or unwilling, to accept responsibility and pay their apportioned costs, we could be required to pay in excess of our pro rata share of incurred remediation costs. Our understanding of the financial strength of other PRPs has been considered, where appropriate, in the determination of our estimated liability.

 

As of March 31, 2010, we believe that established reserves related to these environmental contingencies are adequate to cover probable and reasonably estimable costs associated with the remediation and restoration of these sites.  We believe our currently anticipated capital expenditures for environmental control facility matters are not material.

 

We are subject to other federal, state and local environmental protection laws and regulations and are involved, from time to time, in investigations and proceedings regarding environmental matters.  Such investigations and

 

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proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes.  We believe that our facilities are in material compliance with all such applicable laws and regulations.

 

Regulations issued under the Clean Air Act Amendments of 1990 required the industry to reformulate certain furniture finishes or institute process changes to reduce emissions of volatile organic compounds. Compliance with many of these requirements has been facilitated through the introduction of high solids coating technology and alternative formulations. In addition, we have instituted a variety of technical and procedural controls, including reformulation of finishing materials to reduce toxicity, implementation of high velocity low pressure spray systems, development of storm water protection plans and controls, and further development of related inspection/audit teams, all of which have served to reduce emissions per unit of production. We remain committed to implementing new waste minimization programs and/or enhancing existing programs with the objective of (i) reducing the total volume of waste, (ii) limiting the liability associated with waste disposal, and (iii) continuously improving environmental and job safety programs on the factory floor which serve to minimize emissions and safety risks for employees. We will continue to evaluate the most appropriate, cost effective, control technologies for finishing operations and design production methods to reduce the use of hazardous materials in the manufacturing process.

 

(12)                          Share-Based Compensation

 

On October 10, 2007, the Company’s board of directors and M. Farooq Kathwari, Chairman, President and Chief Executive Officer, agreed to the terms of a new employment agreement expiring on June 30, 2012 (the “Agreement”).  Pursuant to the terms of the Agreement, Mr. Kathwari was awarded options to purchase 150,000 shares of our common stock on October 10, 2007, an additional 90,000 shares on July 1, 2008, and 60,000 shares on July 1, 2009.  The 2007 grant was issued at an exercise price of $34.03, and vests in three equal annual installments on each June 30 of 2008 through 2010.  The 2008 grant, issued at an exercise price of $24.62, vests in two equal annual installments on each June 30 of 2009 and 2010.  The 2009 grant, issued at an exercise price of $10.68, vests on June 30, 2010.  All options awarded under the Agreement were issued at the closing stock price on each grant date, and have a contractual term of 10 years.

 

In connection with the Agreement, Mr. Kathwari received an award of 20,000 restricted shares with vesting based on continuing service and the performance of the Company’s stock price during the 32 month period subsequent to the award date as compared to the Standard and Poor’s 500 index.  An additional 20,000 shares on July 1, 2008, and 20,000 shares on July 1, 2009, with the same service, performance, and vesting conditions (over a 36 month period) were granted.  Also in connection with the Agreement, Mr. Kathwari received on November 13, 2007 an award of 15,000 restricted shares.  These shares are service-based and vest in five equal annual installments on each June 30 of 2008 through 2012.

 

In recognition of Mr. Kathwari’s extraordinary efforts during the recent challenging times for our industry, on February 3, 2010 our Compensation Committee awarded Mr. Kathwari (i) options to purchase an additional 50,000 shares of our common stock at an exercise price of $14.86 per share, and (ii) an additional 15,000 restricted shares.  The stock options vest in four equal annual installments on each February 3 from 2011 through 2014.  The restricted shares are service-based and vest in three equal annual installments on each February 3 from 2011 through 2013.  These awards were in addition to those provided for in the Agreement.

 

On November 12, 2009, the Company awarded options to purchase 83,500 shares of our common stock to a large group of associates at the closing stock price on the grant date of $11.74.  These grants vest in four equal annual installments on the anniversary date of the grant. In February 2010, the Company also awarded 33,700 restricted shares to a large group of associates.  These shares are service-based and vest in three equal annual installments each February of 2011 through 2013.

 

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All options awarded were issued at the closing stock price on each grant date, and have a contractual term of 10 years.

 

(13)                          Earnings Per Share

 

Basic and diluted earnings per share are calculated using the following weighted average share data (in thousands):

 

		Three Months Ended				Nine Months Ended
		March 31,				March 31,
		2010		2009		2010		2009
Weighted average common shares outstanding for basic calculation		29,016		28,861		28,953		28,768
Effect of dilutive stock options and other share-based awards		—		—		—		—
Weighted average common shares outstanding adjusted for dilution calculation		29,016		28,861		28,953		28,768

 

As of March 31, 2010 and 2009, stock options to purchase 2,403,464 and 2,276,345 common shares, respectively, were excluded from the respective diluted earnings per share calculation because their impact was anti-dilutive.

 

(14)                          Comprehensive Income

 

Total comprehensive income represents the sum of net income and items of “other comprehensive income or loss” that are reported directly in equity.  Such items, which are generally presented on a net of tax basis, may include foreign currency translation adjustments, minimum pension liability adjustments (i.e. gains and losses) on certain derivative instruments, and unrealized gains and losses on certain investments in debt and equity securities.  We have reported our total comprehensive income in the Consolidated Statements of Shareholders’ Equity.

 

Accumulated other comprehensive income, comprised of losses on certain derivative instruments and accumulated foreign currency translation adjustments, totaled $1.4 million at March 31, 2010 and $0.5 million at June 30, 2009.  Losses on derivative instruments are the result of cash flow hedging contracts entered into in connection with the issuance of the Senior Notes (see Note 10).  Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operation of five Ethan Allen owned retail design centers located in Canada and our cut and sew plant located in Mexico.  Foreign currency translation adjustments exclude income tax expense (benefit) given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time.

 

(15)                          Financial Instruments

 

ACS Topic 820, “Fair value measurements and disclosures” (SFAS No. 157) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk.

 

In addition to defining fair value, ASC Topic 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is

 

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reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

 

·                  Level 1 — inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

·                  Level 2 — inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·                  Level 3 — inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques.

 

The following section describes the valuation methodologies we use to measure different financial assets and liabilities at fair value.

 

The Company partially adopted ASC Topic 820 on July 1, 2008 due to the fact that a portion of ASC Topic 820 was previously deferred for one year for all nonfinancial assets and nonfinancial liabilities that were not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  On July 1, 2009, the Company adopted the deferred portion of ACS Topic 820.  There was no impact to the Company’s financial position or results of operations resulting from the adoption of the deferred portion of ACS Topic 820.  The Company has now fully adopted ASC Topic 820.

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following table presents our assets and liabilities measured at fair value on a recurring basis at March 31, 2010 (in thousands):

 

		Level 1			Level 2			Level 3			Net Balance
Cash equivalents		$	83,225		$	—		$	—		$	83,225
Available-for-sale securities		—			$	2,023		—			2,023
Total		$	83,225		$	2,023		$	—		$	85,248

 

Cash equivalents consist of money market accounts and mutual funds in U.S. government and agency fixed income securities.  We use quoted prices in active markets for identical assets or liabilities to determine fair value.  At March 31, 2010, $11.3 million of cash equivalents was restricted and is classified as a long-term asset.

 

Available-for-sale securities consist of U.S. municipal bonds with maturities of less than two years.  We obtain fair value from our investment advisors, based upon quoted prices for similar instruments in active markets.  Also see note 4, “Restricted Cash and Investments”, and note 5, “Marketable Securities”.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

We measure certain assets, including our cost and equity method investments, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. During the nine months ended March 31, 2010, we did not record any other-than-temporary impairments on those assets required to be measured at fair value on a nonrecurring basis.

 

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(16)                          Segment Information

 

Our operations are classified into two operating segments: wholesale and retail.  These operating segments represent strategic business areas which, although they operate separately and provide their own distinctive services, enable us to more effectively offer our complete line of home furnishings and accessories.

 

The wholesale segment is principally involved in the development of the Ethan Allen brand, which encompasses the design, manufacture, domestic and offshore sourcing, sale and distribution of a full range of home furnishings and accessories to a network of independently owned and Ethan Allen owned design centers as well as related marketing and brand awareness efforts.  Wholesale revenue is generated upon the wholesale sale and shipment of our product to all retail design centers, including those owned by Ethan Allen.  Wholesale profitability includes (i) the wholesale gross margin, which represents the difference between the wholesale sales price and the cost associated with manufacturing and/or sourcing the related product, and (ii) other operating costs associated with wholesale segment activities.

 

The retail segment sells home furnishings and accessories to consumers through a network of Company owned design centers.  Retail revenue is generated upon the retail sale and delivery of our product to our customers.  Retail profitability includes (i) the retail gross margin, which represents the difference between the retail sales price and the cost of goods purchased from the wholesale segment, and (ii) other operating costs associated with retail segment activities.

 

Inter-segment eliminations result, primarily, from the wholesale sale of inventory to the retail segment, including the related profit margin.

 

We evaluate performance of the respective segments based upon revenues and operating income. While the manner in which our home furnishings and accessories are marketed and sold is consistent, the nature of the underlying recorded sales (i.e. wholesale versus retail) and the specific services that each operating segment provides (i.e. wholesale manufacturing, sourcing, and distribution versus retail selling) are different.  Within the wholesale segment, we maintain revenue information according to each respective product line (i.e. case goods, upholstery, or home accessories and other).

 

A breakdown of wholesale sales by these product lines for the three and nine months ended March 31, 2010 and 2009 is provided as follows:

 

 

Revenue information by product line is not as easily determined within the retail segment. However, because wholesale production and sales are matched, for the most part, to incoming orders, we believe that the allocation of retail sales by product line would be similar to that of the wholesale segment.

 

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Segment information for the three and nine months ended March 31, 2010 and 2009 is set forth as follows:

 

		Three Months Ended						Nine Months Ended
		March 31,						March 31,
		2010			2009			2010			2009
Net sales:
Wholesale segment		$	96,594		$	88,072		$	262,374		$	318,215
Retail segment		107,113			103,305			317,386			406,358
Elimination of inter-company sales		(56,449		)	(51,156		)	(153,010		)	(188,953		)
Consolidated Total		$	147,258		$	140,221		$	426,750		$	535,620
Operating income (loss):
Wholesale segment (1)(2)		$	6,737		$	(6,068	)	$	3,099		$	14,396
Retail segment (3)(4)		(10,366		)	(71,920		)	(31,507		)	(78,156		)
Adjustment of inter-company profit (5)		806			3,281			4,214			11,351
Consolidated Total		$	(2,823	)	$	(74,707	)	$	(24,194	)	$	(52,409	)
Capital expenditures:
Wholesale segment		$	1,319		$	350		$	2,955		$	2,664
Retail segment		977			3,970			4,656			17,802
Acquisitions (6)		—			94			—			741
Consolidated Total		$	2,296		$	4,414		$	7,611		$	21,207

 

		March 31,			June 30,
		2010			2009
Total assets
Wholesale segment		$	284,468		$	276,250
Retail segment		383,386			397,877
Inventory profit elimination (7)		(23,468		)	(27,642		)
Consolidated Total		$	644,386		$	646,485

 

(1)		Operating income (loss) for the wholesale segment for the three months ended March 31, 2009 includes pre-tax restructuring and impairment charges of $5.5 million.
(2)		Operating income (loss) for the wholesale segment for the nine months ended March 31, 2010 and 2009 includes a pre-tax restructuring and impairment net recovery of $0.2 million and charges of $5.9 million, respectively.
(3)		Operating income (loss) for the retail segment for the three months ended March 31, 2010 includes pre-tax restructuring and impairment charges of $0.4 million. For the three months ended March 31, 2009 it includes a goodwill impairment charge of $48.4 million and a pre-tax restructuring and impairment charge of $1.9 million.
(4)		Operating income (loss) for the retail segment for the nine months ended March 31, 2010 includes pre-tax restructuring and impairment charges of $2.2 million. For the nine months ended March 31, 2009 it includes a goodwill impairment charge of $48.4 million and a pre-tax restructuring and impairment credit of $0.2 million.
(5)		Represents the change in the inventory profit elimination necessary to adjust for the embedded wholesale profit contained in Ethan Allen-owned design center inventory existing at the end of the period.
(6)		Acquisitions for the nine months ended March 31, 2009 include the purchase of three retail design centers.
(7)		Represents the wholesale profit contained in Ethan Allen-owned design center inventory that has not yet been realized. These profits are realized when the related inventory is sold.

 

There were 50 independent retail design centers located outside the United States at March 31, 2010. Less than five percent of our net sales were derived from sales to those retail design centers.

 

(17)                      Subsequent Events

 

Ethan Allen declares quarterly cash dividend

Ethan Allen’s Board of Directors has declared a quarterly cash dividend of $0.05 per share, which will be payable to shareholders of record as of July 9, 2010 and paid on July 26, 2010.

 

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