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 September 30,December 31, 2013

OR

[  ]     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     [ ] 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).     [X] Yes      [ ] 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).     [ ] 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 October 25, 2013,January 24, 2014, there were 28,914,60128,918,141 shares of Class A Common Stock,

par value $.01, outstanding.

Table of Contents

PART I - FINANCIAL INFORMATION

 

Item	1.	Financial Statements
Consolidated Balance Sheets			2
Consolidated Statements of Comprehensive Income			3
Consolidated Statements of Cash Flows			4
Consolidated Statements of Shareholders’ Equity			5
Consolidated FinancialStatements			6
Item	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item	3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item	4.	Controlsand Procedures	25
		PART II - OTHER INFORMATION
Item	1.	Legal Proceedings	25
Item	1A.	Risk Factors	25
Item	2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item	3.	Defaults Upon Senior Securities	26
Item	4.	Mine Safety Disclosures	26
Item	5.	Other Information	26
Item	6.	Exhibits	27
SIGNATURES			28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited(Unaudited)

(In thousands, except per share data)

See accompanying notes to consolidated financial statements.

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

		Three months ended September 30,
Operating activities:		2013				2012
Net income		$	9,034			$	10,064
Adjustments to reconcile net income to netcash provided by operating activities:
Depreciation and amortization			4,289				4,606
Compensation expense related to share-based payment awards			373				390
Provision (benefit) for deferred income taxes			57				(211	)
Loss on disposal of property, plant and equipment			369				1,600
Other			246				182
Change in operating assets and liabilities, net ofeffects of acquired businesses:
Accounts receivable			(272	)			(445	)
Inventories			(4,408	)			(739	)
Prepaid and other current assets			60				132
Customer deposits			8,303				(5,175	)
Accounts payable			2,788				(6,484	)
Accrued expenses and other current liabilities			429				2,834
Other assets and liabilities			(123	)			(65	)
Net cash provided by operating activities			21,145				6,689
Investing activities:
Proceeds from the disposal of property, plant & equipment			770				711
Change in restricted cash and investments			499				(6	)
Capital expenditures			(3,305	)			(8,318	)
Acquisitions			-				(598	)
Purchases of marketable securities			(3,990	)			(4,677	)
Sales of marketable securities			5,920				2,885
Other investing activities			83				60
Net cash used in investing activities			(23	)			(9,943	)
Financing activities:
Payments on long-term debt and capital lease obligations			(118	)			(62	)
Payment of cash dividends			(2,605	)			(2,594	)
Other financing activities			140				47
Net cash used in financing activities			(2,583	)			(2,609	)
Effect of exchange rate changes on cash			84				55
Net increase (decrease) in cash & cash equivalents			18,623				(5,808	)
Cash & cash equivalents at beginning of period			72,601				79,721
Cash & cash equivalents at end of period		$	91,224			$	73,913

 

		Six months ended
		December 31,
		2013				2012
Operating activities:
Net income		$	20,589			$	19,910
Adjustments to reconcile net income to netcash provided by operating activities:
Depreciation and amortization			8,699				8,966
Compensation expense related to share-based payment awards			693				773
Provision (benefit) for deferred income taxes			(463	)			(730	)
Loss on disposal of property, plant and equipment			557				1,630
Other			354				177
Change in operating assets and liabilities, net ofeffects of acquired businesses:
Accounts receivable			1,523				3,062
Inventories			(2,708	)			13,464
Prepaid and other current assets			602				4,599
Customer deposits			(6,920	)			(19,423	)
Accounts payable			(1,084	)			(10,981	)
Accrued expenses and other current liabilities			(1,260	)			(3,141	)
Other assets and liabilities			2,024				(126	)
Net cash provided by operating activities			22,606				18,180
Investing activities:
Proceeds from the disposal of property, plant & equipment			771				1,266
Change in restricted cash and investments			498				(11	)
Capital expenditures			(8,558	)			(13,565	)
Acquisitions			-				(598	)
Purchases of marketable securities			(15,716	)			(13,816	)
Sales of marketable securities			10,723				4,740
Other investing activities			175				651
Net cash used in investing activities			(12,107	)			(21,333	)
Financing activities:
Payments on long-term debt and capital lease obligations			(238	)			(124	)
Payment of cash dividends			(5,502	)			(19,617	)
Other financing activities			221				333
Net cash used in financing activities			(5,519	)			(19,408	)
Effect of exchange rate changes on cash			22				107
Net increase (decrease) in cash & cash equivalents			5,002				(22,454	)
Cash & cash equivalents at beginning of period			72,601				79,721
Cash & cash equivalents at end of period		$	77,603			$	57,267

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders’ Equity

ThreeSix Months Ended September 30,December 31, 2013

(Unaudited)

(In thousands)

 

		Common Stock				Additional Paid-in Capital				Treasury Stock				Accumulated Other Comprehensive Income				Retained Earnings				Non- Controlling Interests				Total
Balance at June 30, 2013		$	486			$	363,938			$	(584,041	)		$	684			$	553,083			$	207			$	334,357
Stock issued on share-based awards			-				128				-				-				-				-				128
Compensation expense associated with share-based awards			-				373				-				-				-				-				373
Tax benefit associated with exercise of share based awards			-				(120	)			-				-				-				-				(120	)
Dividends declared on common stock			-				-				-				-				(2,904	)			-				(2,904	)
Comprehensive income			-				-				-				66				9,034				7				9,107
Balance at September 30, 2013		$	486			$	364,319			$	(584,041	)		$	750			$	559,213			$	214			$	340,941

														Accumulated
						Additional								Other								Non-
		Common				Paid-in				Treasury				Comprehensive				Retained				Controlling
		Stock				Capital				Stock				Income				Earnings				Interests				Total
Balance at June 30, 2013		$	486			$	363,938			$	(584,041	)		$	684			$	553,083			$	207			$	334,357
												��
Stock issued on share-based awards			-				186				-				-				-				-				186
Compensation expense associated with share-based awards			-				693				-				-				-				-				693
Tax benefit associated with exercise of share based awards			-				(101	)			-				-				-				-				(101	)
Dividends declared on common stock			-				-				-				-				(5,808	)			-				(5,808	)
Comprehensive income			-				-				-				(1	)			20,589				45				20,633
Balance at December 31, 2013		$	486			$	364,716			$	(584,041	)		$	683			$	567,864			$	252			$	349,960

See accompanying notes to consolidated financial statements.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

(1) 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 definite-lived 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.

Our consolidated financial statements include the accounts of an entity in which we are a majority shareholder and have the power to direct the activities that most significantly impact the entity’s performance. Noncontrolling interest amounts in the entity are immaterial and included in the Consolidated Statement of Comprehensive Income within interest and other miscellaneous income, net.

For the three months ended September 30, 2013 and 2012, the Company has combined selling, general and administrative expenses in a single line item on the Consolidated Statements of Comprehensive Income to remove information that we do not believe is meaningful and to improve comparability with peer companies. Selling expenses, general and administrative expenses, and restructuring and impairment charges had previously been presented separately.

(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 six months ended September 30,December 31, 2013 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 for the year ended June 30, 2013.

(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; impacts from tax law changes; or change in judgment as to the realizability of deferred tax assets. The Company identifies items which are not normal and are non-recurring 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.

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 Company is subject to examination byin such domestic and foreign jurisdictions. As of September 30,December 31, 2013, the Company and certain subsidiaries are currently under audit in the U.S. from 2006 through 2011 in the U.S.2011. 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. It is reasonably possible that some of these audits may be completed during the next twelve months. It is reasonable to expect that various issues relating to uncertain tax benefits will be resolved within the next twelve months as exams are completed or as statutes expire and will impact the effective tax rate.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

The Company’s consolidated effective tax rate was 36.2%35.9% and 36.0% for the three and six months ended September 30,December 31, 2013, respectively, and 36.4%35.6% and 36.0% for the three and six months ended September 30, 2012.December 31, 2012, respectively. The current quarteryear effective tax rate primarily includes tax expense on the current quarter’speriod net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on certain deferred tax assets, partly offset by the reversal and recognition of some uncertain tax positions. The prior periodyear effective tax rate primarily includes the tax expense on that quarter’speriod’s net income, interest expense on uncertain tax positions, and the impact of maintaining valuation allowances on deferred tax assets in the retail segment.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

(4)Restricted Cash and Investments

At September 30,December 31, 2013 and June 30, 2013, we held $14.9 million and $15.4 million respectively, of restricted cash and investments in lieu of providing letters of credit for the benefit of the provider of our workmen’s compensation and other insurance and for the benefit of the issuer of our private label credit card. These funds can be invested in high quality money market mutual funds, U.S. Treasuries and U.S. Government agency fixed income instruments, and cannot be withdrawn without the prior written consent of the secured party. These assets are carried at cost, which approximates market value and are classified as long-term assets because they are not expected to be used within one year to fund operations. See also Note 12, “Fair Value Measurements". Effective January 2014 under the terms of the amended agreement with our provider of our private label credit card program, $6 million of restricted cash was released and moved into the Company’s operating cash accounts.

(5)Marketable Securities

At September 30,December 31, 2013 and June 30, 2013, the Company held marketable securities of $13.4$20.2 million and $15.5 million respectively, classified as current assets, consisting of U.S. municipal and corporate bonds with maturities ranging from less than one year to less than two years, which were rated A/A2 or better by the rating services Standard & Poors (“S&P”) and Moodys Investors Service (“Moodys”) respectively. There have beenwere no material realized or unrealized gains or losses for the threesix months ended September 30,December 31, 2013 and September 30,December 31, 2012. We do not believe there are any impairments considered to be other than temporary at September 30,December 31, 2013. See also Note 12, “Fair Value Measurements".

(6)Inventories

Inventories at September 30,December 31, 2013 and June 30, 2013 are summarized as follows (in thousands):

 

		December 31,				June 30,
		2013				2013
Finished goods		$	111,571			$	110,220
Work in process			8,479				6,961
Raw materials			22,472				22,787
Valuation allowance			(2,558	)			(2,712	)
		$	139,964			$	137,256

 

		September 30,				June 30,
		2013				2013
Finished goods		$	112,181			$	110,220
Work in process			10,729				6,961
Raw materials			21,359				22,787
Valuation allowance			(2,605	)			(2,712	)
		$	141,664			$	137,256

(7)Borrowings

Total debt obligations at December 31, 2013 and June 30, 2013 consist of the following (in thousands):

 

		December 31,				June 30,
		2013				2013
5.375% Senior Notes due 2015		$	129,203			$	129,152
Capital leases and other			1,900				2,137
Total debt			131,103				131,289
Less current maturities			490				480
Total long-term debt		$	130,613			$	130,809

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

(7)Borrowings

Total debt obligations at September 30, 2013 and June 30, 2013 consist of the following (in thousands):

 

		September 30,				June 30,
		2013				2013
5.375% Senior Notes due 2015		$	129,178			$	129,152
Capital leases and other			2,019				2,137
Total debt			131,197				131,289
Less current maturities			485				480
Total long-term debt		$	130,712			$	130,809

In September 2005, we issued $200.0 million in ten-year senior unsecured notes due October 1, 2015 (the "Senior Notes"). The Senior Notes were issued by Global, bearing an annual coupon rate of 5.375% with interest payable semi-annually in arrears on April 1 and October 1. We have used the net proceeds of $198.4 million to improve our retail network, invest in our manufacturing and logistics operations, and for other general corporate purposes. In fiscal years 2011 through 2013, the Company repurchased an aggregate $70.6 million of the Senior Notes in several unsolicited transactions.

We also maintain a $50 million senior secured, asset-based revolving credit facility (the “Facility”). We have not had any revolving loans under the Facility at any time. At both September 30,December 31, 2013 and June 30, 2013, there were $0.6 million of standby letters of credit outstanding under the Facility. The Facility is subject to borrowing base availability and includes a right for the Company to increase the total facility to $100 million subject to certain conditions. 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 ability to incur debt, engage in mergers and consolidations, make restricted payments (including dividends), sell certain assets, and make investments. Remaining availability under the Facility totaled $49.4 million at September 30,December 31, 2013 and at June 30, 2013 and as a result, covenants and other restricted payment limitations did not apply. The Facility expires March 25, 2016, or June 26, 2015 if the Senior Notes have not been refinanced prior to that date.

At both September 30,December 31, 2013 and June 30, 2013, we were in compliance with all covenants of the Senior Notes and the Facility.

(8)Litigation

We are routinely involved in various investigations or as a defendant in litigation, in the ordinary course of business. We are also subject to various 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 proceedings typically concern air emissions, water discharges, and/or management of solid and hazardous wastes. 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.

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. We believe that our facilities are in material compliance with all such applicable laws and regulations. Our currently anticipated capital expenditures for environmental control facility matters are not material.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

Although the outcome of the various claims and proceedings against us cannot be predicted with certainty, management believes that the likelihood is remote that any existing claims or proceedings will have a material adverse effect on our financial position, results of operations or cash flows.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(9)Share-Based Compensation

During the threesix months ended September 30,December 31, 2013, the Company awarded options to purchase 23,499 shares of our common stock with a weighted average exercise price equal to the grant date closing market price of $29.79 per share, a weighted average grant date fair value of $14.34 and vesting over two years. During the threesix months ended September 30,December 31, 2013, options covering 415,550422,639 shares of common stock were cancelled, primarily due to the expiration of their 10 year term. At September 30,December 31, 2013, there are 1,459,4581,466,547 shares of common stock available for future issuance pursuant to the 1992 Stock Option Plan.

(10)Earnings Per Share

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

		Three months ended								Six months ended
		December 31,								December 31,
		2013				2012				2013				2012
Weighted average common shares outstanding for basic calculation			28,916				28,846				28,913				28,841
Effect of dilutive stock options and other share-based awards			376				377				377				341
Weighted average common shares outstanding adjusted for dilution calculation			29,292				29,223				29,290				29,182

 

		Three months ended
		September 30,
		2013				2012
Weighted average common shares outstanding for basic calculation			28,911				28,836
Effect of dilutive stock options and other share-based awards			377				305
Weighted average common shares outstanding adjusted for dilution calculation			29,288				29,141

As of September 30,December 31, 2013 and 2012, stock options to purchase 489,549485,942 and 1,089,382945,882 common shares, respectively, were excluded from the respective diluted earnings per share calculation because their impact was anti-dilutive.

(11)Accumulated Other Comprehensive Income

The following table sets forth the activity in accumulated other comprehensive income for the year to date period ended September 30,December 31, 2013 (in thousands):

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

Foreign currency translation adjustments are the result of changes in foreign currency exchange rates related to our operations in Canada, Belgium, Honduras, and Mexico, and exclude income taxes given that the earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time. The derivative instruments are reclassified to interest expense in our consolidated statements of operations.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

(12)Fair Value Measurements

We determine 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 is calculated based on assumptions that market participants use in pricing the asset or liability, and not on assumptions specific to the Company. In addition, the fair value of liabilities includes consideration of non-performance risk including our own credit risk. Each fair value measurement is reported in one of three levels, 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.

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 September 30,December 31, 2013 and June 30, 2013 (in thousands):

 

December 31, 2013
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	92,538			$	-			$	-			$	92,538
Available-for-sale securities			-				20,157				-				20,157
Total		$	92,538			$	20,157			$	-			$	112,695

 

September 30, 2013
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	106,158			$	-			$	-			$	106,158
Available-for-sale securities			-				13,431				-				13,431
Total		$	106,158			$	13,431			$	-			$	119,589

June 30, 2013
		Level 1				Level 2				Level 3				Balance
Cash equivalents		$	88,034			$	-			$	-			$	88,034
Available-for-sale securities			-				15,529				-				15,529
Total		$	88,034			$	15,529			$	-			$	103,563

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. There were no transfers between level 1 and level 2 during the first threesix months of fiscal 2014 or fiscal 2013. At September 30,December 31, 2013 and June 30, 2013, $14.9 million and $15.4 million respectively, of the cash equivalents were restricted, and classified as long-term assets.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

At September 30,December 31, 2013, available-for-sale securities consist of $12.2$19.1 million in U.S. municipal bonds and $1.2$1.0 million of corporate bonds, and at June 30, 2013, available-for-sale securities consisted of $14.0 million in U.S. municipal bonds and $1.5 million of corporate bonds, all with maturities of less than two years. The bonds are rated A/A2 or better by S&P/Moodys respectively. As of September 30,December 31, 2013 and June 30, 2013, there were no material gross unrealized gains or losses on available-for-sale securities.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

As of September 30,December 31, 2013 and June 30, 2013, the contractual maturities of our available-for-sale securities were as follows:

No investments have been in a continuous loss position for more than one year, and no other-than-temporary impairments were recognized. See also Note 4, "Restricted Cash and Investments" and Note 5, "Marketable Securities".

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

We measure certain assets at fair value on a non-recurring basis. These assets are recognized at fair value when they are deemed to be impaired. During the three month periodssix months ended September 30,December 31, 2013, and 2012, we did not record any impairments on those assets required to be measured at fair value on a non-recurring basis.basis and during the six months ended December 31, 2012 we recorded a $1.6 million impairment relating to real estate assets held for sale.

(13)Segment Information

Our operations are classified into two operating segments: wholesale and retail. These operating segments represent strategic business areas of our vertically integrated business which, although they operate separately and provide their own distinctive services, enable us to more efficiently control the quality and cost of 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 operated and Ethan Allen operated 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 operated 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 operated 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.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

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). The allocation of retail sales by product line is reasonably similar to that of the wholesale segment. A breakdown of wholesale sales by these product lines for the three and six months ended September 30,December 31, 2013 and 2012 is provided as follows:

 

		Three months ended								Six months ended
		December 31,								December 31,
		2013				2012				2013				2012
Case Goods			33	%			37	%			34	%			38	%
Upholstered Products			51	%			48	%			49	%			47	%
Home Accessories and Other			16	%			15	%			17	%			15	%
			100	%			100	%			100	%			100	%

		Three months ended September 30,
		2013				2012
Case Goods			35	%			39	%
Upholstered Products			47	%			46	%
Home Accessories and Other			18	%			15	%
			100	%			100	%

Segment information for the three and six months ended September 30,December 31, 2013 and 2012 is provided below (in thousands):

 

		Three months ended								Six months ended
		December 31,								December 31,
		2013				2012				2013				2012
Net sales:
Wholesale segment		$	113,133			$	108,172			$	226,331			$	219,589
Retail segment			151,496				151,827				293,323				300,906
Elimination of inter-company sales			(71,525	)			(68,748	)			(144,891	)			(141,807	)
Consolidated Total		$	193,104			$	191,251			$	374,763			$	378,688
Operating income:
Wholesale segment		$	14,366			$	8,892			$	30,498			$	24,897
Retail segment			4,206				6,017				4,002				7,065
Adjustment of inter-company profit (1)			1,278				2,448				1,294				3,349
Consolidated Total		$	19,850			$	17,357			$	35,794			$	35,311
Depreciation & Amortization:
Wholesale segment		$	1,915			$	1,954			$	3,806			$	3,981
Retail segment			2,495				2,406				4,893				4,985
Consolidated Total		$	4,410			$	4,360			$	8,699			$	8,966
Capital expenditures:
Wholesale segment		$	3,018			$	1,989			$	4,492			$	4,643
Retail segment			2,235				3,258				4,066				8,922
Acquisitions			-				-				-				598
Consolidated Total		$	5,253			$	5,247			$	8,558			$	14,163

		Three months ended September 30,
		2013				2012
Net sales:
Wholesale segment		$	113,198			$	111,417
Retail segment			141,827				149,079
Elimination of inter-company sales			(73,366	)			(73,059	)
Consolidated Total		$	181,659			$	187,437
Operating income (loss):
Wholesale segment		$	16,132			$	16,005
Retail segment			(204	)			1,048
Adjustment of inter-company profit (1)			16				901
Consolidated Total		$	15,944			$	17,954
Depreciation & Amortization:
Wholesale segment		$	1,891			$	2,027
Retail segment			2,398				2,579
Consolidated Total		$	4,289			$	4,606
Capital expenditures:
Wholesale segment		$	1,474			$	2,654
Retail segment			1,831				5,664
Acquisitions			-				598
Consolidated Total		$	3,305			$	8,916

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

(1)	Represents the change in wholesale profit contained in the retail segment inventory at the end of the period.
(2)	Represents the wholesale profit contained in the retail segment inventory that has not yet been realized. These profits are realized when the related inventory is sold.

Our international net sales are comprised of our wholesale segment sales to independent retailers and our retail segment sales to consumers through our Company operated design centers. The number of international design centers, and the related net sales as a percent of our consolidated net sales is shown in the following table. 

(14)Recently Issued Accounting Pronouncements

There have been no recently issued accounting pronouncements during the threesix months ended September 30,December 31, 2013 or impending accounting changes that are expected to have a material effect on the Company’s financial statements.

(15)Financial Information About the Parent, the Issuer and the Guarantors

On September 27, 2005, Global (the "Issuer") issued $200 million aggregate principal amount of Senior Notes which have been guaranteed on a senior basis by Interiors (the "Parent"), and other wholly owned domestic subsidiaries of the Issuer and the Parent, including Ethan Allen Retail, Inc., Ethan Allen Operations, Inc., Ethan Allen Realty, LLC, Lake Avenue Associates, Inc. and Manor House, Inc. The subsidiary guarantors (other than the Parent) are collectively called the "Guarantors". The guarantees of the Guarantors are unsecured. All of the guarantees are full, unconditional and joint and several and the Issuer and each of the Guarantors are 100% owned by the Parent. Our other subsidiaries which are not guarantors are called the "Non-Guarantors".

The following tables set forth the condensed consolidating balance sheets as of September 30,December 31, 2013 and June 30, 2013, the condensed consolidating statements of operations for the three and six months ended September 30,December 31, 2013 and 2012, and the condensed consolidating statements of cash flows for the threesix months ended September 30,December 31, 2013 and 2012 of the Parent, the Issuer, the Guarantors and the Non-Guarantors.

ETHAN ALLEN INTERIORS INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(Unaudited)

CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

September 30, 2013

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	-			$	74,888			$	12,810			$	3,526			$	-			$	91,224
Marketable securities			-				13,431				-				-				-				13,431
Accounts receivable, net			-				12,306				242				1				-				12,549
Inventories			-				-				165,829				5,827				(29,992	)			141,664
Prepaid expenses and other current assets			-				7,015				13,431				2,069				-				22,515
Intercompany receivables			-				831,631				304,803				(3,654	)			(1,132,780	)			-
Total current assets			-				939,271				497,115				7,769				(1,162,772	)			281,383
Property, plant and equipment, net			-				9,256				263,836				16,450				-				289,542
Goodwill and other intangible assets			-				37,905				7,223				-				-				45,128
Restricted cash and investments			-				14,934				-				-				-				14,934
Other assets			-				2,262				1,509				814				-				4,585
Investment in affiliated companies			695,856				(113,612	)			-				-				(582,244	)			-
Total assets		$	695,856			$	890,016			$	769,683			$	25,033			$	(1,745,016	)		$	635,572
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt		$	-			$	-			$	485			$	-			$	-			$	485
Customer deposits			-				-				63,752				3,649				-				67,401
Accounts payable			-				6,516				18,564				703				-				25,783
Accrued expenses and other current liabilities			3,021				32,213				14,406				1,574				-				51,214
Intercompany payables			351,894				(7,854	)			765,023				23,717				(1,132,780	)			-
Total current liabilities			354,915				30,875				862,230				29,643				(1,132,780	)			144,883
Long-term debt			-				129,178				1,534				-				-				130,712
Other long-term liabilities			-				4,473				14,185				378				-				19,036
Total liabilities			354,915				164,526				877,949				30,021				(1,132,780	)			294,631
Shareholders’ equity			340,941				725,490				(108,266	)			(4,988	)			(612,236	)			340,941
Total liabilities and shareholders’ equity		$	695,856			$	890,016			$	769,683			$	25,033			$	(1,745,016	)		$	635,572

CONDENSED CONSOLIDATING BALANCE SHEET

(In thousands)

December 31, 2013

		Parent				Issuer				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	-			$	68,896			$	5,639			$	3,068			$	-			$	77,603
Marketable securities			-				20,157				-				-				-				20,157
Accounts receivable, net			-				10,493				261				-				-				10,754
Inventories			-				-				162,888				5,609				(28,533	)			139,964
Prepaid expenses and other current assets			-				8,747				10,941				1,786				-				21,474
Intercompany receivables			-				836,612				309,181				(3,728	)			(1,142,065	)			-
Total current assets			-				944,905				488,910				6,735				(1,170,597	)			269,952
Property, plant and equipment, net			-				9,173				264,796				16,419				-				290,388
Goodwill and other intangible assets			-				37,905				7,223				-				-				45,128
Restricted cash and investments			-				14,935				-				-				-				14,935
Other assets			-				2,554				1,520				804				-				4,878
Investment in affiliated companies			707,766				(111,222	)			-				-				(596,544	)			-
Total assets		$	707,766			$	898,250			$	762,449			$	23,958			$	(1,767,142	)		$	625,281
Liabilities and Shareholders’ Equity
Current liabilities:
Current maturities of long-term debt		$	-			$	-			$	490			$	-			$	-			$	490
Customer deposits			-				-				48,764				3,414				-				52,178
Accounts payable			-				5,796				15,820				295				-				21,911
Accrued expenses and other current liabilities			3,030				31,330				13,869				1,283				-				49,512
Intercompany payables			354,776				(8,126	)			770,388				25,027				(1,142,065	)			-
Total current liabilities			357,806				29,000				849,331				30,019				(1,142,065	)			124,091
Long-term debt			-				129,204				1,409				-				-				130,613
Other long-term liabilities			-				4,072				16,136				409				-				20,617
Total liabilities			357,806				162,276				866,876				30,428				(1,142,065	)			275,321
Shareholders’ equity			349,960				735,974				(104,427	)			(6,470	)			(625,077	)			349,960
Total liabilities and shareholders’ equity		$	707,766			$	898,250			$	762,449			$	23,958			$	(1,767,142	)		$	625,281