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.
Statement Regarding the Impact of the COVID-19 Pandemic
The World Health Organization ("WHO") on March 11, 2020, declared novel
coronavirus 2019 ("COVID-19") a global pandemic. During the three and six months
ended December 31, 2021, we saw improvement in our business conditions, however,
we continued to see supply chain challenges faced by the furniture industry due
to limited availability of ocean containers and significant increases in ocean
container rates, limited availability and inflationary pressures in key
materials, and labor shortages both in Asia and the United States. The COVID-19
pandemic remains fluid because of the evolution of COVID-19 variants, and the
extent of the ongoing impact on our business may be significant, however, we are
unable to predict the extent or nature of these impacts at this time.
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
2021 annual report on Form 10-K.
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, 2021, and 2020. The amounts presented are percentages of the
Company's net sales.
Three Months Ended Six Months Ended
December 31, December 31,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 93.3 79.5 88.2 79.0
Gross margin 6.7 20.5 11.8 21.0
Selling, general and
administrative expenses 12.4 15.9 13.0 14.7
Restructuring expense 0.4 0.7 0.3 1.0
(Gain) on disposal of assets
due to restructuring - (4.4) (0.5) (2.6)
Operating (loss) income (6.1) 8.3 (1.0) 7.9
Interest expense 0.2 - 0.2 -
Other (income) (0.1) (0.1) (0.0) (0.1)
(Loss) income before income
taxes (6.2) 8.4 (1.2) 8.0
Income tax (benefit)
provision (0.9) 1.3 0.0 2.5
Net (loss) income (5.3) % 7.1 % (1.2) % 5.5 %
Results of Operations for the Quarter Ended December 31, 2021, vs. 2020
Net sales were $141.7 million for the quarter ended December 31, 2021, compared
to net sales of $119.1 million in the prior year's quarter, an increase of
18.9%. The increase in sales of $22.6 million was primarily driven by an
increase of $22.5 million related to home furnishing products sold through
retailers as compared to the prior-year quarter. Sales growth of home furnishing
products sold through e-commerce channels was flat as compared to the prior-year
quarter.
Retail home furnishings backlog was $121 million for the quarter ended December
31, 2021, an increase of 20.4% as compared to the $101 million home furnishings
backlog in the prior-year quarter.
Gross margin as a percent of net sales for the quarter ended December 31, 2021,
was 6.7%, compared to 20.5% for the prior-year quarter, a decrease of 1,380
basis points ("bps"). The 1,380-bps decrease was primarily due to a 1,120 basis
points decrease related to higher ancillary charges caused by domestic supply
chain disruptions and higher per diem charges, a decrease of 140 basis points
related to capacity growth investments in a third, additional manufacturing
plant in Mexico and a new distribution facility in Greencastle, PA., and a
decrease of 120 basis points primarily related to cost inflation for materials,
labor, and transportation, partially offset by price realization.
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Selling, general, and administrative ("SG&A") expenses decreased $1.4 million to
$17.5 million in the quarter ended December 31, 2021, as compared to $18.9
million in the same quarter of fiscal 2021. As a percentage of net sales, SG&A
was 12.4% in the second quarter of fiscal 2022 compared to 15.9% of net sales in
the prior-year quarter. The decrease of 350 basis points is primarily due to a
decrease of 90 basis points in lower incentive compensation expenses, a decrease
of 100 basis points of bad debt expense due to a customer bankruptcy in the
prior-year quarter, and a decrease of 160 basis points due to volume leverage
partially offset by growth investments.
During the quarter ended December 31, 2021, we incurred $0.62 million of
restructuring expenses primarily for ongoing utilities and maintenance costs for
our facilities listed as held for sale and former employee expenses. See Note 5,
Restructuring, of the Notes to Consolidated Financial Statements, included in
this Quarterly Report on Form 10-Q for more information.
Income tax (benefit) was ($1.2) million, or an effective rate of 13.8%, and $1.5
million, or an effective rate of 15.5% during the quarter ended December 31,
2021, and December 31, 2020, respectively.
Net loss was ($7.5) million, or ($1.13) per diluted share for the quarter ended
December 31, 2021, compared to net income of $8.5 million, or $1.13 per diluted
share in the prior-year quarter.
Results of Operations for the Six Months Ended December 31, 2021, vs. 2020
Net sales were $279.4 million for the six months ended December 31, 2021,
compared to net sales of $224.4 million in the prior-year six-month period, an
increase of 24.5%. The increase in sales of $55.0 million was primarily driven
by $58.0 million related to home furnishing products sold through retailers and
partially offset by a decrease of $3.0 million for home furnishing products sold
through e-commerce channels.
Gross margin as a percent of net sales for the six months ended December 31,
2021, was 11.8%, compared to 21.0% for the prior-year six-month period, a
decrease of 920 bps. The 920 bps increase was primarily driven by the same
factors discussed above for the quarter ended December 31, 2021.
Selling, general and administrative expenses increased $3.2 million in the six
months ended December 31, 2021, compared to the prior-year six-month period. As
a percentage of net sales, SG&A was 13.0% in the six months ended December 31,
2021, compared to the prior-year six-month period of 14.7%. The 170 bps decrease
was primarily due to the same factors discussed above for the quarter ended
December 31, 2021, and partially offset by phasing out the COVID-19 expense
reduction initiatives in the prior-year quarter. The six-month period ended
December 31, 2020, included a $1.3 million bad debt expense due to a customer
bankruptcy.
Restructuring expenses were $0.77 million during the six months ended December
31, 2021, primarily for former employee expenses and for ongoing utilities and
maintenance costs for our facilities listed as held for sale. See Note 5,
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, 2021, we completed the sale of one of
our Harrison, Arkansas facilities, resulting in total net proceeds of $1.45
million, and a total gain of $1.4 million.
During the six months ended December 31, 2020, we completed the sale of our
Dubuque, Iowa, Lancaster, Pennsylvania, and one of our Harrison, Arkansas
facilities, resulting in total net proceeds of $16.4 million, and a total gain
of $5.9 million.
Income tax expense was $0.1 million, or an effective rate of (3.4%), during the
six months ended December 31, 2021, compared to income tax expense of
$5.6 million in the prior-year six-month period, or an effective tax rate of
31.3%.
Net loss was ($3.2) million, or ($0.47) per diluted share for the six months
ended December 31, 2021, compared to net income of $12.3 million, or $1.61 per
diluted share in the prior-year six-month period.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) on December 31, 2021
was $171.1 million compared to $128.7 million on June 30, 2021. The $42.4
million increase in working capital was due to an increase in cash of $2.7
million, an increase in inventory of $17.9 million, a decrease in accounts
payable of $29.7 million, an increase in other current liabilities of $1.8
million, a decrease in other current assets of $0.1 million, partially offset by
a decrease of $6.0 million in trade receivables. Capital expenditures were $1.54
million and are estimated to be in the range of $10.5 to $12.5 million for the
fiscal year ending June 30, 2022.
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A summary of operating, investing, and financing cash flow is shown in the
following table:
Six Months Ended
December 31,
(in thousands) 2021 2020
Net cash (used in) operating activities $ (40,998) $ (10,934)
Net cash provided by investing activities 402 17,864
Net cash provided by (used in) financing activities 43,341 (21,831)
Increase (decrease) in cash and cash equivalents $ 2,745 $ (14,901)
Net cash (used in) operating activities
For the six months ended December 31, 2021, net cash used in operating
activities was $41.0 million, which primarily consisted of net loss of ($3.2)
million, adjusted for non-cash items including depreciation of $2.7 million,
gain from the sale of capital assets of $1.9 million, stock-based compensation
of $2.2 million, and provisions for losses of $0.2 million. Net cash used in
operating assets and liabilities was $41.0 million and was primarily due to an
increase in inventory of $17.9 million due to continued inventory build, a
decrease in accounts payable of $29.5 million, an increase in other current
assets of $0.5 million, an increase in other liabilities of $0.1 million, and
partially offset by a decrease in trade receivables of $5.8 million.
For the six months ended December 31, 2020, net cash used in operating
activities was $10.9 million, which primarily consisted of net income of $12.4
million, adjusted for non-cash items including, depreciation of $2.7 million,
gain from the sale of capital assets of $5.9 million, change in deferred income
taxes of $2.1 million, stock-based compensation of $2.0, million and bad debt
expense of $1.3 million. Net cash used in operating assets and liabilities was
$25.5 million and was primarily due to an increase in trade receivables of $15.4
million due to higher sales, an increase in inventory of $21.4 million due to
inventory build for the third and fourth quarter, partially offset by an
increase in accrued liabilities of $5.0 million and a decline in other current
assets of $6.0 million, primarily due to an income tax refund.
Net cash provided by investing activities
For the six months ended December 31, 2021, net cash provided by investing
activities was $0.40 million, primarily due to proceeds of $1.94 million for the
sale of our Harrison, AR, facility and the sale of our transportation fleet
equipment, partially offset by capital expenditures of $1.54 million.
For the six months ended December 31, 2020, net cash provided by investing
activities was $17.9 million, primarily due to proceeds of $18.5 million for the
sale of our Dubuque, IA and Lancaster, PA, facilities and one of our Harrison,
AR facilities, partially offset by capital expenditures of $0.7 million.
Net cash (used in) provided by financing activities
For the six months ended December 31, 2021, net cash provided by financing
activities was $43.3 million, primarily due to proceeds from lines of credit of
$81.3 million, offset by payments on lines of credit of $25.0 million, $9.7
million for treasury stock purchases, dividends paid of $3.1 million, and $0.2
million for tax payments on employee vested restricted shares netted with
proceeds from the issuance of common stock.
For the six months ended December 31, 2020, net cash used in financing
activities was $21.8 million, primarily due to $20.0 million for treasury stock
purchases and dividends paid of $1.5 million.
Line of Credit
On September 8, 2021, the Company, as the borrower, entered into a credit
agreement (the "Credit Agreement") with Wells Fargo Bank, National Association
(the "Lender"), and the other lenders party thereto. The Credit Agreement has a
five-year term and provides for up to an $85 million revolving line of credit.
Subject to certain conditions, the Credit Agreement also provides for the
issuance of letters of credit in an aggregate amount up to $5,000,000 which,
upon issuance, would be deemed advances under the revolving line of credit. The
Company's $1.2 million letters of credit previously issued by the Lender are
being treated as outstanding under the Credit Agreement. Proceeds of borrowings
were used to refinance all indebtedness owed to Dubuque Bank & Trust and for
working capital purposes. The Company's obligations under the Credit Agreement
are secured by substantially all of its assets, excluding real property. Subject
to certain conditions, borrowings under the Credit Agreement bear interest at
LIBOR plus 1.25% or 1.50% per annum, or an effective interest rate of 1.35% on
December 31, 2021. If LIBOR becomes unavailable, the replacement rate will be
determined pursuant to the terms of the Credit Agreement. The Credit Agreement
contains customary representations, warranties, and covenants, including a
financial covenant to maintain a fixed coverage ratio of not less than
1.00:1.00. In addition, the Loan Agreement places restrictions on
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the Company's ability to incur additional indebtedness, to create liens or other
encumbrances, to sell or otherwise dispose of assets, and to merge or
consolidate with other entities.
As of December 31, 2021, there was $59.7 million outstanding under the Credit
Agreement, exclusive of fees and letters of credit.
Letters of credit outstanding at Wells Fargo Bank N.A. ("Wells") as of December
31, 2021, totaled $1.2 million.
Contractual Obligations
As of December 31, 2021, 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, 2021.
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