GENERAL:
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this quarterly report on Form
10-Q.
CRITICAL ACCOUNTING POLICIES:
There have been no material changes to our critical accounting policies and
estimates from the information provided in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included in our 2019
annual report on Form 10-K, with the exception of adopting the lease standard in
the first quarter of fiscal 2020, as described in Note 1 of the Notes to
Consolidated Financial Statements, included in this Quarterly Report on Form
10-Q.
Overview
The following table has been prepared as an aid in understanding the Company's
results of operations on a comparative basis for the three and six months ended
December 31, 2019 and 2018. Amounts presented are percentages of the Company's
net sales.
Three Months Ended Six Months Ended
December 31, December 31,
2019 2018 2019 2018
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold (84.4) (81.9) (83.6) (81.3)
Gross margin 15.6 18.1 16.4 18.7
Selling, general and administrative (17.6) (16.4) (17.5) (17.1)
Restructuring expense
(4.9) - (5.4) -
Gain on sale of facility 0.0 - 9.3 -
Operating (loss) income (6.9) 1.8 2.8 1.6
Other income 0.1 - 0.1 0.1
(Loss) income before income taxes (6.8) 1.8 2.9 1.7
Income tax benefit (provision)
1.5 (0.5) (0.8) (0.5)
Net (loss) income (5.2) % 1.3 % 2.0 % 1.2 %
Results of Operations for the Quarter Ended December 31, 2019 vs. 2018
The following table compares net sales for the quarter ended December:
Three Months Ended
December 31,
(in thousands) 2019 2018 $ Change % Change
Residential $ 94,074 $ 99,414 $ (5,340) (5.4) %
Contract 8,875 18,938 (10,063) (53.1)
Total $ 102,949 $ 118,352 $ (15,403) (13.0) %
Net sales were $102.9 million for the quarter ended December 31, 2019 compared
to net sales of $118.4 million in the prior year quarter, a decrease of 13.0%.
Residential net sales declined 5.4% when compared to the prior year quarter.
The decline in residential net sales was primarily driven by the implementation
of the tariff on furniture imported from China at 10% followed by an increase to
25%, which triggered significant price increases to the market place and led to
the contraction of volume. This was partially offset by increased sales of our
ready to assemble furniture through our ecommerce channel. Our ready to assemble
furniture line sold primarily through ecommerce grew 30.1% during the quarter
ended December 31, 2019 compared to the prior year quarter due to strong holiday
sales and promotions. Contract net sales were down $10.1 million, of which $7.3
million was primarily driven by our decision to exit the commercial office and
custom-designed hospitality product lines, coupled with a decline in our
healthcare and vehicle products from lower demand.
Gross margin as a percent of net sales for the quarter ended December 31, 2019
was 15.6%, compared to 18.1% for the prior year quarter, a decline of 250 basis
points ("bps"). Aggressive product pricing across our ecommerce and brick and
mortar channels during the holiday shopping season contracted margins
approximately 90 bps in the quarter. Additionally, as part of our customer and
product profitability initiative, we executed a SKU rationalization process
which resulted in an inventory valuation adjustment accounting for
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approximately 150 bps of margin contraction. The remaining margin compression
was due to increased costs aimed at improving lead times and customer experience
of approximately 80 bps, offset by a benefit related to our success in
collecting foreign VAT.
Selling, general and administrative (SG&A) expenses decreased $1.3 million in
the quarter ended December 31, 2019 compared to the prior year quarter. The
decrease in SG&A expenses was due to the CEO transition expenses recorded in the
prior year, volume reductions and restructuring savings, which were partially
offset by ERP expenses, as well as higher incentive compensation.
During the quarter ended December 31, 2019, we incurred $5.1 million of
restructuring expenses primarily for facility closures, professional fees and
employee termination costs as part of our previously announced comprehensive
transformation program. See Note 4 Restructuring of the Notes to Consolidated
Financial Statements, included in this Quarterly Report on Form 10-Q for more
information.
Income tax benefit was $1.6 million, or an effective rate of 22.8%, during the
quarter ended December 31, 2019 compared to income tax expense of $0.6 million
in the prior year quarter, or an effective tax rate of 27.5%.
Net loss was $5.4 million, or $0.68 per diluted share for the quarter ended
December 31, 2019, compared to net income of $1.6 million, or $0.20 per diluted
share in the prior year quarter.
Results of Operations for the Six Months Ended December 31, 2019 vs. 2018
The following table compares net sales for the six months ended December:
Six Months Ended
December 31,
(in thousands) 2019 2018 $ Change % Change
Residential $ 182,685 $ 195,457 $ (12,772) (6.5) %
Contract 20,612 36,382 (15,770) (43.3)
Total $ 203,297 $ 231,839 $ (28,542) (12.3) %
Net sales were $203.3 million for the six months ended December 31, 2019
compared to net sales of $231.8 million in the prior year six-month period, a
decrease of 12.3%. Residential net sales declined 6.5% when compared to the
prior year six-month period. The decline in residential net sales are primarily
attributable to the same factors discussed above for the quarter ended December
31, 2019 versus December 31, 2018. Contract net sales were down $15.8 million,
of which $11.6 million was primarily driven by our decision to exit the
commercial office and custom-designed hospitality product lines, coupled with a
decline in our healthcare and vehicle seating products due to demand.
Gross margin as a percent of net sales for the six months ended December 31,
2019 was 16.4%, compared to 18.7% for the prior year six-month period, a decline
of 230 bps. The 230 bps decline was primarily driven by a decline of 170 bps due
to lower volume and product mix. Aggressive product pricing across our ecommerce
and brick and mortar channels during the holiday shopping season contracted
margins approximately 50 bps in the current six-month period. Additionally, as
part of our customer and product profitability initiative, in the second quarter
of fiscal 2020, we executed a SKU rationalization process which resulted in an
inventory valuation adjustment representing 70 bps of margin contraction in the
six-month period. Increased costs to serve customers to improve lead times and
customer experience, favorable material and labor costs, and a benefit related
to our success in collecting foreign VAT also contributed to margin performance
in the six-month period.
Selling, general and administrative expenses decreased $4.0 million in the six
months ended December 31, 2019 compared to the prior year six-month period. The
decline of $4.0 million was primarily due to the CEO transition expenses
recorded in the prior year, decreased volume and restructuring savings. These
SG&A reductions were partially offset by ERP expenses and higher expenses for
incentive compensation.
During the six months ended December 31, 2019, we incurred $11.3 million of
restructuring expenses primarily for facility closures, professional fees and
employee termination costs as part of our previously announced comprehensive
transformation program. See Note 4 Restructuring of the Notes to Consolidated
Financial Statements, included in this Quarterly Report on Form 10-Q for more
information.
During the six months ended December 31, 2019, we completed the sale of our
Riverside, California property for a sale price of $20.5 million generating net
proceeds of $19.6 million after customary closing costs, prorations and
commissions. This resulted in a recognized, pre-tax gain on sale of asset in the
amount of $18.9 million.
Income tax expense was $1.6 million, or an effective rate of 28.1%, during the
six months ended December 31, 2019 compared to income tax expense of
$1.1 million in the prior year six-month period, or an effective tax rate of
27.3%.
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Net income was $4.2 million, or $0.51 per diluted share for the six months ended
December 31, 2019, compared to net income of $2.9 million, or $0.36 per diluted
share in the six-month period.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) at December 31, 2019
was $121.0 million compared to $118.2 million at June 30, 2019. The increase in
working capital was primarily attributable to proceeds from the sale of our
Riverside, California facility, which was the main driver behind an increase in
cash and cash equivalents of $15.1 million. Trade receivables increased $3.4
million, restructuring cost accruals declined $5.0 million, inventory declined
$7.1 million due to strong sales, inventory management and SKU rationalization
activities and other currents assets declined $6.2 million, primarily due to the
collection of an income tax refund. Accounts Payable increased $2.0 million.
Capital expenditures are estimated to be a total of $4.0 to $5.0 million in
fiscal 2020.
A summary of operating, investing and financing cash flow is shown in the
following table:
Six Months Ended
December 31,
(in thousands) 2019 2018
Net cash provided by operating activities $ 779 $ 10,930Net cash provided by (used in) investing activities 17,839 (9,477)
Net cash used in financing activities
(3,531) (3,622)
Increase (decrease) in cash and cash equivalents $ 15,087 $ (2,169)
Net cash provided by operating activities
For the six months ended December 31, 2019, net cash provided by operating
activities was $0.8 million, which primarily consisted of net income of $4.2
million, adjusted for non-cash depreciation of $4.9 million, gain from the sale
of capital assets of $19.0 million and non-cash stock based compensation of $3.3
million. Net cash provided in operating assets and liabilities was $8.5
million. The cash provided in operating assets and liabilities of $8.5 million,
was primarily due to a decline in inventory of $7.1 million and other current
assets of $7.1 million, coupled with an increase in accounts payable of $1.8
million, partially offset by an increase trade receivables of $3.2 million and a
reduction in accrued liabilities of $4.2. The decline in other current assets
was primarily driven by a tax refund.
For the six months ended December 31, 2018, net cash provided by operating
activities was $10.9 million, which primarily consisted of net income of $2.9
million, adjusted for non-cash depreciation of $3.7 million, a decrease in
inventory of $2.3 million, and increases in accounts payable of $3.6 million and
accounts receivable of $1.3 million.
Net cash provided by (used in) investing activities
For the six months ended December 31, 2019, net cash provided by investing
activities was $17.8 million, primarily due to proceeds of $19.6 million from
the sale of our Riverside, California facility, partially offset by capital
expenditures of $1.8 million.
For the six months ended December 31, 2018, net cash used in investing
activities was $9.5 million. Capital expenditures were $17.5 million, partially
offset by net proceeds from sales of investments of $7.9 million.
Net cash used in financing activities
For the six months ended December 31, 2019, net cash used in financing
activities was $3.5 million, primarily due to dividends paid of $3.5 million.
For the six months ended December 31, 2018, net cash used in financing
activities was $3.6 million, primarily due to dividends paid of $3.5 million.
Lines of Credit
The Company maintains a credit agreement which provides unsecured short-term
working capital financing up to $10.0 million with interest of LIBOR plus 1%
(2.76% at December 31, 2019), including up to $4.0 million of letters of credit.
Letters of credit outstanding at December 31, 2019 totaled $1.3 million, leaving
borrowing availability of $8.7 million. The credit agreement expires June 30,
2020.
The Company maintains an additional unsecured $10.0 million line of credit, with
interest at prime minus 2%, (2.75% at December 31, 2019) that was scheduled to
mature on December 31, 2019. Effective December 31, 2019, the Company renewed
this unsecured $10.0
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million line of credit, with interest at prime minus 2%, subject to a floor of
3.75%, and extended the maturity date to June 30, 2020. No amount was
outstanding on the line of credit at December 31, 2019.
Contractual Obligations
As of December 31, 2019, there have been no material changes to our contractual
obligations presented in our Annual Report on Form 10-K for the year ended
June 30, 2019.
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