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
2022 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 nine months ended
March 31, 2023, and 2022. The amounts presented are percentages of the Company's
net sales.
Three Months Ended Nine Months Ended
March 31, March 31,
2023 2022 2023 2022
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 81.2 84.3 82.7 86.9
Gross margin 18.8 15.7 17.3 13.1
Selling, general and administrative
expenses 16.7 11.6 16.0 12.5
Environmental remediation - - (1.0) -
Restructuring (income) expense - - - 0.2
Other expense - - 0.1 -
Gain on disposal of assets due to
restructuring - - - (0.3)
Operating income 2.1 4.1 2.2 0.7
Interest expense 0.2 0.1 0.3 0.1
Other (income) - - - -
Income before income taxes 1.9 4.0 1.9 0.6
Income tax provision 0.4 0.2 0.3 0.1
Net income and comprehensive income 1.5 % 3.8 % 1.6 % 0.5 %
Results of Operations for the Quarter Ended March 31, 2023 vs. 2022
Net sales were $99.1 million for the quarter ended March 31, 2023, compared to
net sales of $140.4 million in the prior year quarter, a decrease of 29.4%. The
decrease in sales of $41.3 million was primarily driven by a decrease of $36.6
million related to home furnishing products sold through retailers and a
decrease of $4.7 million for home furnishing products sold through e-commerce
channels, compared to the prior year quarter. Home furnishing sales have
reverted to be in-line with pre-pandemic volumes as prior year quarter sales
were especially strong due to the surge in COVID-induced spending on home
furnishings.
Retail home furnishings backlog was $63 million as of the quarter ended March
31, 2023, a decrease of 36.4% as compared to $99 million home furnishings
backlog in the prior year quarter, mainly due to the Company's focus on reducing
backlog down to 3-5 week lead times and softness of consumer demand in the
quarter.
Gross margin as a percent of net sales for the quarter ended March 31, 2023, was
18.8%, compared to 15.7% for the prior year quarter, an increase of 310 basis
points ("bps"). The 310-bps increase was primarily due to cost control
initiatives, partially offset by the deleveraging of fixed costs due to sales
volume decline in the quarter as compared to the prior year quarter.
Selling, general and administrative ("SG&A") expenses increased $0.2 million or
1.2% to $16.5 million in the third quarter ended March 31, 2023, as compared to
$16.3 million in the prior year quarter. The increase is primarily due to
incentive compensation related expenses
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offset by a decline in all other expenses in the quarter ended March 31, 2023.
As a percentage of net sales, SG&A was 16.7% in the quarter ended March 31, 2023
compared to 11.6% of net sales in the prior year quarter. The 510-bps increase
was primarily due to lower sales volume, partially offset by a decrease in
certain fixed expenses for the quarter ended March 31, 2023.
During the quarter ended March 31, 2023, no additional restructuring expenses
were realized 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.
Income tax expense was $0.4 million, or an effective rate of 21.0% for the
quarter ended March 31, 2023, compared to an income tax expense of $0.3 million,
or an effective rate of 5.9% during the quarter ended March 31, 2022. The prior
year's effective tax rate was primarily impacted by changes in our deferred tax
assets for which we received income tax benefit due to our full valuation
allowance.
Net income was $1.5 million, or $0.28 per diluted share for the quarter ended
March 31, 2023, compared to net income of $5.3 million, or $0.82 per diluted
share in the prior year quarter.
Results of Operations for the Nine Months Ended March 31, 2023, vs. 2022
Net sales were $287.9 million for the nine months ended March 31, 2023, compared
to net sales of $419.8 million in the prior-year nine-month period, a decrease
of 31.4%. The decrease in sales of $131.9 million was primarily driven by a
decrease of $117.5 million related to home furnishing products sold through
retailers and a decrease of $14.4 million for home furnishing products sold
through e-commerce channels. The sales decrease was primarily driven by the same
factors discussed above for the quarter ended March 31, 2023.
Gross margin as a percent of net sales for the nine months ended March 31, 2023,
was 17.3%, compared to 13.1% for the prior-year nine-month period, an increase
of 420 bps. The 420-bps increase was primarily driven by the same factors
discussed above for the quarter ended March 31, 2023.
Selling, general and administrative expenses decreased $6.7 million in the nine
months ended March 31, 2023, compared to the prior-year nine-month period. The
decrease is primarily due to a decrease in sales volume related expenses of $2.8
million and a decrease in all other expenses of $3.9 million in fiscal year
2023. As a percentage of net sales, SG&A was 16.0% in the nine months ended
March 31, 2023, compared to the prior-year nine-month period of 12.5%. The
350-bps increase was primarily due to lower sales volume, partially offset by a
decrease in certain fixed expenses for the nine months ended March 31, 2023.
During the nine months ended March 31, 2023, the Company recorded income of $2.8
million related to the settlement of the environmental remediation liability.
See Note 10, Commitments and Contingencies, of the Notes to Consolidated
Financial Statements, included in this Quarterly Report on Form 10-Q for more
information.
During the nine months ended March 31, 2023, no additional restructuring
expenses were realized 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 nine months ended March 31, 2022, 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.
Income tax expense was $0.8 million, or an effective rate of 14.8%, during the
nine months ended March 31, 2023, compared to income tax expense of $0.4 million
in the prior-year nine-month period, or an effective tax rate of 17.2%. The
effective tax rate for the nine months ended March 31, 2023, was primarily
impacted by adjustments to uncertain tax positions, as well as the reversal of
the valuation allowance associated with movements in certain deferred tax
assets.
Net income was $4.6 million, or $0.85 per diluted share for the nine months
ended March 31, 2023, compared to net income of $2.1 million, or $0.31 per
diluted share in the prior-year nine-month period.
Liquidity and Capital Resources
Working capital (current assets less current liabilities) on March 31, 2023, was
$106.6 million compared to $125.4 million on June 30, 2022. The $18.8 million
decrease in working capital was primarily due to a decrease in inventory of
$27.9 million, a decrease in net trade receivables of $4.6 million, and an
increase of operating lease liabilities of $1.4 million partially offset by a
decrease in accounts payable of $6.6 million, a decrease in the environmental
liability of $3.6 million, an increase in other current assets of $2.6 million,
a decrease in the restructuring liability of $1.3 million, a decrease in other
current liabilities of $0.8 million, and an increase in cash of $0.2 million.
Refer to discussion of working capital changes below, under Net cash provided by
(used in) operating activities. Capital expenditures were $3.6 million during
the nine months ended March 31, 2023.
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A summary of operating, investing, and financing cash flow is shown in the
following table:
Nine Months Ended
March 31,
(in thousands) 2023 2022
Net cash provided by (used in) operating activities $ 30,462 $ (3,909)
Net cash (used in) investing activities
(3,597) (930)
Net cash (used in) provided by financing activities (26,640) 6,900
Increase in cash and cash equivalents
$ 225 $ 2,061
Net cash provided by (used in) operating activities
For the nine months ended March 31, 2023, net cash provided by operating
activities was $30.5 million, which primarily consisted of net income of $4.6
million, adjusted for non-cash items including depreciation of $3.5 million,
stock-based compensation of $2.5 million, and a decrease in provisions for
losses of $0.1 million. Net cash provided by operating assets and liabilities
was $20.0 million and was primarily due to a decrease in inventories of $27.9
million, and a decrease in trade receivables of $4.7 million, partially offset
by a decrease in accrued liabilities of $3.4 million, a decrease in payables of
$6.3 million, a decrease in other current assets of $2.6 million, and a decrease
in other long-term liabilities of $0.2 million. Sales volume declines have
driven the decrease in trade receivables, as well as decreased inventory
purchases driving declines in inventory and payables. Accrued liabilities
declined primarily due to the environmental remediation settlement.
For the nine months ended March 31, 2022, net cash used in operating activities
was $3.9 million, which primarily consisted of net income of $2.1 million,
adjusted for non-cash items including depreciation of $4.0 million, gain from
the sale of capital assets of $1.9 million, stock-based compensation of $1.6
million, and provisions for losses of $0.2 million. Net cash used in operating
assets and liabilities of $9.9 million was primarily due to a decrease in
accounts payable of $28.5 million, and a decrease in other liabilities of $1.6
million partially offset by a decrease in trade receivables of $11.2 million, a
decrease in inventory of $7.0 million due to decrease inventory purchases, and a
decrease in other current assets of $2.0 million.
Net cash (used in) provided by investing activities
For the nine months ended March 31, 2023, net cash used in investing activities
was $3.6 million, due to capital expenditures of $3.6 million.
For the nine months ended March 31, 2022, net cash used in investing activities
was $0.9 million, primarily due to capital expenditures of $2.8 million
partially offset by proceeds of $1.9 million for the sale of our Harrison, AR,
facility, and the sale of our transportation fleet equipment.
Net cash (used in) provided by financing activities
For the nine months ended March 31, 2023, net cash used in financing activities
was $26.6 million, primarily due to payments on lines of credit of $274.5
million, partially offset by proceeds from lines of credit of $254.5 million. In
addition to the line of credit activity, net cash used in financing activities
was also due to dividends paid of $3.2 million, $3.0 million for purchases of
company stock, and $0.4 million for tax payments on employee vested restricted
shares netted with proceeds from the issuance of common stock.
For the nine months ended March 31, 2022, net cash provided by financing
activities was $6.9 million, primarily due to proceeds from lines of credit of
$148.6 million, offset by payments on lines of credit of $110.5 million, $27.9
million for purchases of company stock, dividends paid of $3.1 million, and $0.2
million for tax payments on employee vested restricted shares.
Line of Credit
On August 28, 2020, the Company entered a two-year secured $25.0 million
revolving line of credit with Dubuque Bank and Trust Company, with an interest
rate of 1.50% plus LIBOR, subject to a floor of 3.00%. The revolving line of
credit was secured by essentially all the Company's assets, excluding real
property, and required the Company to maintain compliance with certain financial
and non-financial covenants. This line of credit was subsequently canceled in
the first quarter of fiscal year 2022.
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 million which,
upon issuance, would be deemed advances under the revolving line of credit. The
Company's $1.1 million letters of credit previously issued by the Lender are
being treated as outstanding under the Credit Agreement
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and reduce the amount of available borrowings under the revolving line of
credit. 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 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 6.1% on March 31, 2023. When 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 to1.00. In addition, the Loan Agreement
places restrictions on 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 March 31, 2023,
management believes the Company was in compliance with all covenants.
On April 18, 2022, the Company, as the borrower, entered into a first amendment
to the September 8, 2021, Credit Agreement ("First Amendment to the Credit
Agreement"), with the Lender and the lenders thereto. The amendment to the
Credit Agreement changed the definition of the term 'Payment Conditions' and
further defines "default" or "event of default" and the calculation of the Fixed
Charge Coverage Ratio.
As of March 31, 2023, there was $17.7 million outstanding under the Credit
Agreement, exclusive of fees and letters of credit.
Letters of credit outstanding at the Lender as of March 31, 2023, totaled $1.1
million.
Contractual Obligations
As of March 31, 2023, 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, 2022.
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