Flexsteel Industries, Inc. Thursday reported second quarter and fiscal year-to-date financial results.
Net sales were $129.4 million for the quarter compared to net sales of $118.5 million in the prior year quarter, an increase of 9.2%. Net sales were $249.2 million for the six months ended December 31, 2017, an increase of 8.1%. For both the quarter and the six-month period, higher residential net sales are primarily due to increased volume and to a lesser extent new customers. Higher contract net sales are primarily due to increased volume offset by the previously disclosed intentional decrease in sales to certain customers.
Gross margin as a percent of net sales for the quarter ended December 31, 2017 was 21.2%, compared to 22.6% for the prior year quarter. For the six months ended December 31, 2017, gross margin as a percent of net sales was 21.5%, compared to 23.1% for the prior year period. The decrease in gross margin as a percentage of net sales is primarily due to increased labor and raw material costs partially offset by volume leverage on fixed costs. In response to margin pressure, the Company implemented select sales price increases late in the fiscal quarter.
Selling, general and administrative (SG&A) expenses were 15.2% of net sales in the current year quarter, compared to 15.5% of net sales in the prior year quarter. For the six months ended December 31, 2017, SG&A expenses decreased to 15.2% compared to 16.1% in the prior year period primarily due to improved fixed cost leverage.
During the current fiscal year, 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 current year quarter was 21.1% compared to 36.7% in the prior year quarter. For the six months ended December 31, 2017, the effective tax rate was 30.2% compared to 37.7% in the prior year period. The current year quarter and fiscal year-to-date rates were positively impacted by the passage of the Tax Cuts and Jobs Act (Tax Reform) resulting in a $0.16 per share increase in net income. Beginning in fiscal year 2019, the Company expects the effective tax rate to be between 25% and 27%.
The above factors resulted in net income of $6.2 million or $0.78 per share for the quarter ended December 31, 2017, compared to $5.3 million or $0.68 per share in the prior year quarter. For the six months ended December 31, 2017, net income was $12.4 million or $1.56 per share compared to $10.1 million or $1.29 per share in the prior year period.
Working capital (current assets less current liabilities) at December 31, 2017 was $163 million compared to $158 million at June 30, 2017. Changes in working capital include increases of $11 million in inventory, $5 million in accounts receivable, $2 million in investments and $2 million in accounts payable; and a decrease of $11 million in cash and cash equivalents. Accounts receivable increased due to increased sales volume. Inventory increased to improve service levels.
For the six months ended December 31, 2017, capital expenditures were $12.9 million including $6.8 million invested to upgrade the business information system and $3.7 million for the construction of a new manufacturing facility.
All earnings per share amounts are on a diluted basis.
Outlook
During the remainder of fiscal year 2018, the Company expects high single digit revenue growth including the previously disclosed intentional decrease in sales to certain contract customers. The Company expects continued inflationary pressure on certain raw materials and moderating labor cost increases. The Company is focused on gross margin expansion through targeted sales price increases, enhanced service levels and driving operational efficiencies.
For the balance of the fiscal year, the Company expects to capitalize $2 million related to business information system software and development, $10 million for the construction of a manufacturing facility and $2 million for operations. The Company believes it has adequate working capital and borrowing capabilities to meet these requirements.
The Company remains committed to its core strategies, which include providing a wide range of quality product offerings and price points to the residential and contract markets, combined with a conservative approach to business. The Company will maintain its focus on a strong balance sheet through emphasis on cash flow and increasing profitability. The Company believes these core strategies are in the best interest of its shareholders.