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DUBUQUE, Iowa — Flexsteel Industries reported second quarter and fiscal year-to-date financial results.
Net sales were $118.4 million for the quarter compared to record net sales of $129.4 million in the prior year quarter, a decrease of 8.5%. Net sales were $231.8 million for the six months ended Dec. 31, a decrease of 7.0% from the prior year period. For both the quarter and the six-month period compared to prior year, lower residential net sales were primarily driven by decreased unit volume in residential ecommerce product, followed by lower unit volume in home furnishings products. Overall, on a sequential quarter basis, residential product unit volume excluding products sold through ecommerce distribution, improved by a percentage in the low-single digits.
Higher second quarter contract net sales were primarily driven by double-digit increased volume in recreational vehicle and healthcare products offset by the delivery timing of hospitality products and the previously disclosed plan to decrease sales to certain commercial office product customers.
Gross margin as a percent of net sales for the quarter ended Dec. 31 was 18.2%, compared to 21.2% for the prior year quarter. For the six months ended Dec. 31, gross margin as a percent of net sales was 18.7%, compared to 21.5% for the prior year period. The quarter and six-month period decrease in gross margin as a percentage of net sales was primarily driven by increased labor and raw material costs, partially offset by sell price increases. Labor costs moderated but remained higher than expected and accounted for approximately 130 basis point decrease for the second quarter and 160 basis point decrease for the six months ended Dec. 31 versus the comparable prior year periods. Raw material price increases, primarily in polyurethane and plywood, resulted in approximately 60 basis points and 100 basis points of gross margin deterioration during the second quarter and six-month period compared to the prior year quarter and six-month period, respectively. Onetime costs associated with the relocation of equipment and inventory to the new Dubuque manufacturing facility in the second quarter resulted in an adverse impact to gross margin of 40 basis points for the quarter and 20 basis points for the six months ended Dec. 31. The move is expected to be completed during the third fiscal quarter of 2019. Consistent with ASC 606, the classification of certain rebates as a reduction of sales adversely impacted both the quarter and six-month period results by approximately 80 basis points as compared to prior year periods.
Selling, general and administrative (SG&A) expenses were 16.4% of net sales in the second quarter, compared to 15.2% of net sales in the second quarter of fiscal 2018. For the six months ended Dec. 31, SG&A expenses were 17.1% compared to 15.2% in the prior year period. The company’s SG&A expenses increased 50 basis points during the second quarter due to the transition of SAP consulting services from capitalizable development services to stabilization maintenance services.
The company incurred $0.7 million pre-tax SG&A expense, or 60 basis points, during the quarter ended Dec. 31 due to expenses associated with the appointment of Jerry Dittmer as president and chief executive officer. On an after-tax basis, the expense represents $0.5 million or $0.07 per share. SG&A expenses for the six months also included $1.3 million pre-tax expense for one-time severance and ancillary costs related to the retirement of the former president and chief executive officer. On an after-tax basis, the expense represents $1.0 million or $0.13 per share.
During the prior fiscal year six-month period, the company completed a $6.5 million sale of a facility and recognized a pre-tax gain of $1.8 million. On an after-tax basis, the gain represents $1.3 million or $0.16 per share.
The effective tax rate for the second quarter was 27.5% compared to 21.1% in the prior year quarter. For the six months ended Dec. 31, 2018, the effective tax rate was 27.3% compared to 30.2% in the prior year period. The prior year quarter was positively impacted by a one-time adjustment for the passage of the Tax Cuts and Jobs Act (Tax Reform).
The above factors resulted in net income of $1.6 million or $0.20 per share for the quarter ended Dec. 31, compared to $6.2 million or $0.78 per share in the prior year quarter. For the six months ended Dec. 31, net income was $2.9 million or $0.36 per share compared to $12.4 million or $1.56 per share in the prior year period.
All earnings per share amounts are on a diluted basis.
Working capital (current assets less current liabilities) at December 31, 2018 was $137 million compared to $149 million at June 30, 2018. Changes in working capital included an increase of $2 million in accounts payable and $2 million in other current assets and decreases of $8 million in investments and $2 million in inventory and $2 million cash and cash equivalents.
For the six months ended December 31, 2018, capital expenditures were $17.5 million including $13.3 million for the construction of a new manufacturing facility.
SOURCE: Flexsteel Industries press release