Inscape (INQ.TO) today announced its second quarter financial results ended October 31, 2016.
Sales in the second quarter of fiscal year 2017 at $27.8 million continued the upward trend in quarterly sales that started since the second quarter of fiscal year 2016, when the sales were at $21.1 million. The improvement in sales was attributable to increased volumes in all segments of the business and strengthened US dollar.
These positive factors along with managed overheads resulted in higher gross profit as a percentage of sales, operating income and cash position as at the end of October 31, 2016.
"We are pleased to see the fifth consecutive quarter of improvement. Maintaining focus on the four pillars of strategy that we set in place over two years ago is yielding the results we planned for," said Jim Stelter, President. "Innovative product launches, including our partnership with West Elm, have captured new audiences and business across all sectors. The Inscape brand has increased market awareness over the past year, especially among our core audiences of the architectural/design community and new committed dealer partners."
The second quarter of fiscal year 2017 ended with a net income of $1.6 million or 11 cents per share, compared with a net income of $0.6 million or 4 cents per share in the same quarter of last year. Net income of both quarters included certain unrealized and non-cash expenses that had significant impacts on the net income per GAAP. With the exclusion of these unrealized and non-cash items, the second quarter of fiscal 2017 had an adjusted net income of $3.0 million, compared with adjusted net loss of $1.2 million in the same quarter of last year, an improvement of $4.2 million.
On a year-to-date basis, the six-month period had a net income of $0.07 million, compared to a net loss of $4.5 million, or 31 cents per share a year ago. The current year-to-date period included certain unrealized and non-cash expense and $0.2 million severance obligation, which were considered as unusual operating expenses. With the exclusion of these unusual items, the year-to-date second quarter had an adjusted net income of $3.2 million, an improvement of $7.2 million from last year adjusted net loss of $4.0 million. Adjusted net income or loss is an non-GAAP measure, which does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers.
The following is a reconciliation of net income (loss) before taxes calculated in accordance with GAAP to the non-GAAP measure of adjusted net income (loss):
Sales in the second quarter of fiscal year 2017 was $6.7 million or 31.6% higher than the same quarter of the previous year. The current year's quarter benefited from strong U.S. exchange rate, which accounted for about $2.9 million of the year-over-year sales increase. With the exclusion of the currency exchange gain, the normalized sales were 24.9% higher than the same quarter of last year. Strong growth was experienced in all segments of the business.
Year-to-date sales improved from last year's $36.4 million to the current year's $51.8 million, an increase of $15.4 million or 42.3%. The increase included about $6.3 million U.S. exchange gain. Sales on a normalized basis with the exclusion of the U.S. currency gain were 30.8% higher than last year. Sales were up in all segments.
Gross profit as a percentage of sales for the second quarter of fiscal year 2017 was 32.8%, an improvement of 8.8 percentage points from the 24.0% of the same quarter of the previous year. Gains from strong US exchange rate and favourable overhead absorption due to higher volume were partially offset by competitive pressure on selling prices.
Year-to-date gross profit percentage was at 30.8%, an increase of 8.1 percentage points or 35.7% compared to last year's 22.7%. Contributions from higher U.S. exchange rate and sales volume were reduced by pressure on realized selling prices and product mix with higher costs.
Selling, general and administrative expenses ("SG&A") in the second quarter of fiscal year 2017 were 23.7% of sales, compared to 29.6% in the same quarter of last year. The dollar amount incurred was $0.3 million or 5.5% higher than last year, of which $0.2 million was increase in variable selling expenses relating to higher sales. Fixed SG&A went up by $0.1 million mainly because of increase in the fair values of share-based compensation at the end of the quarter, partially offset by reduced overheads in various areas.
Year-to-date SG&A was 26.1% of sales, compared to 34.4% for the same period of last year. The dollar amount incurred was $0.98 million higher than last year, consisting of $0.6 million variable selling expenses associated with higher sales and $0.38 million fixed overheads. The increases in fixed SG&A consists mainly of increased investments in fixed selling and marketing expenses, accrued bonuses, severance obligation incurred in the first quarter of the year and fair value of share-based compensation.
At the previous fiscal year ended April 30, 2016, the Company recorded a valuation allowance of $7.0 million to derecognize the future income tax benefit of loss carryforwards as deferred tax assets. For the six-month period ended October 31, 2016, $0.9 million of the $7.0 million valuation allowance was utilized to reduce the Company's income tax expense.
At the end of the second quarter of fiscal 2017, the company was debt-free and increased its cash, cash equivalent and short-term investments total from $10.5 million at the beginning of the year to $12.1 million at the end of the second quarter.