UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 


 

Form 10-K

 


 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended February 3, 20192, 2020

 

Commission file number 000-25349 

 

 

HOOKER FURNITURE CORPORATION

(Exact name of registrant as specified in its charter)

 

Virginia

54-0251350

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

 

440 East Commonwealth Boulevard, Martinsville, VA  24112

(Address of principal executive offices, Zip Code)

 

(276) 632-2133

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

Trading Symbol(s)

Name of Each Exchange

on Which Registered

Common Stock, no par value

HOFT

NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☐ No ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒  No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated Filer ☐

Accelerated Filer ☒

 

Non-accelerated Filer   ☐

Smaller reporting company ☐

 

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐ No ☒

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $514.7$229.4 million.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of April 12, 2019:13, 2020:

 

Common stock, no par value

11,785,14711,872,461

(Class of common stock)

(Number of shares)

 

Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders scheduled to be held June 12, 201911, 2020 are incorporated by reference into Part III.

 


Table of Contents

 

Hooker Furniture Corporation

 

TABLE OF CONTENTS

 

Part I

 

Page

 

 

 

Item 1.

Business

5

Item 1A.

Risk Factors

9

Item 1B.

Unresolved Staff Comments

1516

Item 2.

Properties

16

Item 3.

Legal Proceedings

16

Item 4.

Mine Safety Disclosures

16

 

Information about our Executive Officers of Hooker Furniture Corporation

17

 

 

 

Part II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

2019

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2120

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

3841

Item 8.

Financial Statements and Supplementary Data

3941

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

3941

Item 9A.

Controls and Procedures

3942

Item 9B.

Other Information

4042

 

 

 

Part III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

4143

Item 11.

Executive Compensation

4143

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

4143

Item 13.

Certain Relationships and Related Transactions, and Director Independence

4143

Item 14.

Principal Accounting Fees and Services

4143

 

 

 

Part IV

 

 

 

 

 

Item 15.

Exhibits, and Financial Statement Schedules

4244

Item 16.

Form 10-K Summary

4446

 

 

 

Signatures

4547

 

 

 

Index to Consolidated Financial Statements

F-1

 


Table of Contents

All references to 2019, 2018, 2017, 2016 2020, 2019, 2018, 2017and 20152016 or other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31, with fiscal 20192020 ending on February 3, 2019.2, 2020. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 20192019 fiscal year that ended on February 3, 20192019 was a 53-week fiscal year.

 

All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, and the domestic upholstery operations contained in All Other:Domestic Upholstery Segment including Bradington-Young, Sam Moore, and Shenandoah Furniture.Furniture, and All Other which includes H Contract and Lifestyle Brands.

 

During fiscal 2018, we acquired substantially all of the assets and assumed certain liabilities of Shenandoah Furniture, Inc. The results of operations of Shenandoah are included in our results beginning on September 29, 2017 (the(the date of the acquisition). Consequently, prior-year information before September 29, 2017 for Shenandoah is not included in the financial statements presented in this report. We acquired the assets and assumed certain liabilities of Home Meridian International, Inc. on February 1, 2016, the first day of our 2017 fiscal year. Consequently, Home Meridian’s results are not included in our results prior to the 2017 fiscal year.

References to the “Shenandoah acquisition” refer to the acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017. References to the “HMI acquisition” refer to the acquisition of substantially all of the assets of Home Meridian International, Inc. on February 1, 2016.

References in this document to “SFI” refer to the counterparties to the asset purchase agreement, Shenandoah Furniture, Inc. and its two former shareholders, entered into on September 6, 2017. References in this document to “Shenandoah” or “Shenandoah Furniture” refer to the business operations of SFI acquired by us on September 29, 2017. References in this document to “HMI” refer to Home Meridian International, Inc., the counter-party to the asset purchase agreement we entered into on January 6, 2016. References in this document to “Home Meridian” or “Home Meridian segment” refer to the business operations and operating segment that was created upon the closing of the asset purchase agreement on February 1, 2016.

 

 

Forward-Looking Statements

 

Certain statements made in this report, including statements under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to:

 

The effect and consequences of the coronavirus (COVID-19) pandemic or future pandemics on matters including U.S. and local economies; our business operations and continuity; the health and productivity of our employees; and the impact on our supply chain and customer base;

 

general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

 

adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, such as the current U.S. administration imposing a 10%25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for additional or increased tariffs in the future;

 

changessourcing transitions away from China, including the lack of adequate manufacturing capacity and skilled labor and longer lead times, due to competition and increased demand for resources in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products;those countries;

 

the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers;

our inability to collect amounts owed to us;

2

Table of Contents

disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;

the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance or risks not covered by cyber insurance;

disruptions and damage (including due to weather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in Vietnam and China;

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, ocean freight costs and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders;

 

higher than expected employee medicalchanges in U.S. and workers’ compensation costs that may increaseforeign government regulations and in the costpolitical, social and economic climates of the countries from which we source our high-deductible healthcareproducts;

2

disruptions involving our vendors or the transportation and workers compensation plans;handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;

 

our ability to successfully implement our business plan to increase sales and improve financial performance;

product liability claims;

risks related to our recently terminated Pension Plan, including future plan settlement charges, possible additional cash contributions or other costs or expenses; changes in actuarial assumptions, the interest rate environment, the return on plan assets and future funding obligations, which can affect future funding obligations, costs and plan liabilities;

risks related to our other defined benefit plans;

the possible impairment of our long-lived assets, which can result in reduced earnings and net worth;

the cost and difficulty of marketing and selling our products in foreign markets;

price competition in the furniture industry;

difficulties in forecasting demand for our imported products;

 

changes in domesticrisks associated with product defects, including higher than expected costs associated with product quality and international monetary policiessafety, and fluctuations in foreign currency exchange rates affectingregulatory compliance costs related to the pricesale of our importedconsumer products and raw materials;costs related to defective or non-compliant products, including product liability claims and costs to recall defective products;

 

the cyclical nature of the furniture industry, which is particularly sensitivedisruptions and damage (including due to changesweather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in consumer confidence, the amount of consumers’ income available for discretionary purchases,Vietnam and the availability and terms of consumer credit;China;

 

risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs;

 

the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers;

 

our inability to collect amounts owed to us;

the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance or risks not covered by cyber insurance;

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

higher than expected employee medical and workers’ compensation costs that may increase the cost of our high-deductible healthcare and workers compensation plans;

product liability claims;

risks related to our other defined benefit plans;

the possible impairment of our long-lived assets, which can result in reduced earnings and net worth;

capital requirements and costs, including the servicing of our floating-rate term loans;

risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

 

capital requirementsthe cost and costs, includingdifficulty of marketing and selling our products in foreign markets;

changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the servicingprice of our floating-rate term loans;imported products and raw materials;

the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;

price competition in the furniture industry;

 

3

 

competition from non-traditional outlets, such as internet and catalog retailers; and

 

changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit; and

higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products.credit.

 

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

 

Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” below.

 

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

 

4

 

Hooker Furniture Corporation

Part I

 

ITEM 1.     BUSINESS

 

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 20172018 shipments to U.S. retailers, according to a 20182019 survey by a leading trade publication.

 

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

 

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.

 

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins. This acquisition has provided the Home Meridian segment’s leadership with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.

 

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer, has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically-produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

 

Reportable Segments

 

Furniture sales account for all of our net sales. For financial reporting purposes and as described further below, we are organized into twothree reportable segments, Hooker Branded, Home Meridian and Home Meridian.Domestic Upholstery. Our other businesses are aggregated into “All Other”. See Note 1718 to our consolidated financial statements for additional financial information regarding our operating segments.

 

Products

 

Our product lines cover the design spectrum of residential furniture: traditional, contemporary and transitional. Further, our product lines are in the “good”, “better” and “best” product categories, which carry medium and upper price points and consist of:

 

The Hooker Branded segment which includes two businesses:

Hooker Casegoods, which covers a wide range of design categories and includes home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand; and

Hooker Upholstery, imported upholstered furniture targeted at the upper-medium price-range.

 

The Home Meridian segment which includes the following brands/marketing units:

Accentrics Home, home furnishings centered around an eclectic mix of unique pieces and materials that offer a fresh take on home fashion;

Pulaski Furniture, casegoods covering the complete design spectrum in a wide range of bedroom, dining room, accent and display cabinets at medium price points;

Samuel Lawrence Furniture, value-conscious offerings in bedroom, dining room, home office and youth furnishings;

Prime Resources International, value-conscious imported leather motion upholstery; and

Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings targeted toward four and five-star hotels.hotels, and

HMidea, 2019 start-up that provides better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers.

 

5

 

All Other consists of:The Domestic Upholstery segment which includes the following operations:

Bradington-Young, a seating specialist in upscale motion and stationary leather furniture;

Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization; and

Shenandoah Furniture, an upscale upholstered furniture business specializing in private label sectionals, modulars, sofas, chairs, ottomans, benches, beds and dining chairs in the upper-medium price points for lifestyle specialty retailers; andretailers.

 

All Other consisting of:

The H Contract product line which supplies upholstered seating and casegoods to upscale senior living and assisted living facilities through designers, design firms, industry dealers and distributors that service that market.market; and

Lifestyle Brands, a business started in fiscal 2019 targeted at the interior designer channel.

 

SourcingSourcing

 

Imported Products

 

We have sourced products from foreign manufacturers for nearly thirty years, predominantly from Asia. Imported casegoods and upholstered furniture together accounted for approximately 83% of our net sales in fiscal 2020, 84% of our net sales in fiscal 2019, and 87% of our net sales in fiscal 2018, and 90% of our net sales in fiscal 2017. The decrease in imported casegoods and upholstered furniture sales as a percentage of total sales is primarily due to the Shenandoah acquisition on September 29, 2017, as that business’ products are entirely domestically manufactured.2018.

 

Our imported furniture business is subject to inherent risks in importing products manufactured abroad, including, but not limited to, supply disruptions and delays due to a variety of reasons, including due to the coronavirus (COVID-19) pandemic and possible similar health-related issues, currency exchange rate fluctuations, transportation-related issues, economic and political developments and instability, as well as the laws, policies and actions of foreign governments and the United States. These laws, policies and actions may include regulations affecting trade or the application of tariffs, much like the current U.S. administration’s imposition of aan initial 10% tariff in September 2018 that increased to 25% in May 2019 on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China during fiscal 2019. See Item 1A, “Risk Factors” for additional information on2019 and 2020. In response to these tariffs, we began re-sourcing products from non-tariff countries, primarily Vietnam, and reduced our risks related to imported products.Chinese imports by about half by the end of fiscal 2020.

 

Because of the large number and diverse nature of the foreign suppliers from which we source our imported products, we have flexibility in the sourcing of products among any particular supplier or country. However, a disruption in our supply chain from a major supplier or from Vietnam or China in general, could significantly compromise our ability to fill customer orders for products manufactured at that factory or in that country. We believe we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supplySupply disruptions and delays on selected items could occur for up to six months.months or longer. If we were to be unsuccessful in obtaining those products from other sources or at a comparable cost, then a disruption in our supply chain from a major furniture supplier, or from Vietnam or China in general, could decrease our sales, earnings and liquidity. In early fiscal 2021 because of plant closures in China due to COVID-19, many of our Chinese suppliers were closed or operating at reduced capacity and we experienced some out of stocks on better selling items. We offered and sold available goods on hand and in transit but were unable to fully mitigate the entire sales loss from these out-of-stocks. These suppliers were in the process of returning to full capacity when the COVID-19 crisis hit the U.S. Consequently, some of these supplier locations are closing temporarily or reducing capacity. We expect outages in select products as a result.

Given the sourcing capacity available in China, Vietnam and other low-cost producing countries, we currently believe the risks from these potential supply disruptions are manageable.manageable, however, we have limited insight into the extent to which our business could be further impacted by COVID-19 and there are many unknowns including, how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. See Item 1A, “Risk Factors” for additional information on our risks related to imported products.

6

 

For imported products, we generally negotiate firm pricing with foreign suppliers in U.S. Dollars, typically for a term of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effects of any price increases from suppliers in the prices we charge for imported products. However, these price changes could adversely impact sales volume and profit margin during affected periods. Conversely, a relative increase in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could decrease the cost of imported products and favorably impact net sales and profit margins during affected period. However, due to other factors, such as inflationary pressure in China and other countries, we may not fully realize savings when exchange rates fall. Therefore, lower exchange rates may only have a tempering effect on future price increases by merely delaying cost increases on imported products. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

 

6

Table of Contents

Raw Materials

 

Significant materials used in manufacturing our domestic upholstered furniture products include leather, fabric, foam, wooden and metal frames and electronic mechanisms. Most of the leather is imported from Italy, South America and China, and is purchased as full hides and cut and sewn in our facilities or is purchased as pre-cut and sewn kits processed by our vendors to our pattern specifications. We believe our sources for raw materials are adequate and that we are not dependent on any one supplier. However, we have seen some delays in some pre-cut and sewn kits imported from China as a result of COVID-19. Our five largest domestic upholstery suppliers accounted for approximately 28% of our raw materials purchases for domestic upholstered furniture manufacturing operations in fiscal 2019. One supplier accounted for 7.5% of such raw material purchases in fiscal 2019.2020. Should disruptions with this supplier occur, we believe we could successfully source these products from other suppliers without significant disruption to our operations.

 

Customers

 

Our home furnishings products are sold through a variety of retailers including independent furniture stores, department stores, mass merchants, national chains, warehouse clubs, catalog merchants, interior designers and e-commerce retailers. NoOne customer accounted for more than 10%approximately 11% of our consolidated sales in fiscal 2019.2020. Our top five customers accounted for nearly one-thirdapproximately 30% of our fiscal 20192020 consolidated sales. The loss of any one or more of these customers would have a material adverse impact on our business. 1.2%1.6% of our sales in fiscal 20192020 were to international customers, which we define as sales outside of the United States and Canada.

 

Competition

 

The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers and importers, none of which dominates the market in our price points. While the markets in which we compete include a large number of relatively small and medium-sized manufacturers, certain competitors have substantially greater sales volumes and financial resources than we do. U.S. imports of furniture produced overseas, such as from Vietnam and China, have stabilized in recent years. The primary competitive factors for home furnishings in our price points include price, style, availability, service, quality and durability. Competitive factors in the hospitality and contract furniture markets include product value and utility, lead times, on-time delivery and the ability to respond to requests for special and non-standard products. We believe our design capabilities, ability to import and/or manufacture upholstered furniture, product value, longstanding customer and supplier relationships, significant sales, distribution and inventory capabilities, ease of ordering, financial strength, experienced management and customer support are significant competitive advantages.

 

Warehousing and Distribution

 

We distribute furniture to retailers directly from factories and warehouses in Asia via our container direct programs and from our distribution centers in Virginia, North Carolina and California, and in limited cases, from customer operated warehouses in strategic locations. It is our policy and industry practice to allow order cancellation for casegoods up to the time of shipment or, in the case of container direct orders, up until the time the container is booked with the ocean freight carrier, therefore, customer orders for casegoods are not firm. However, domestically produced upholstered products are predominantly custom-built and consequently, cannot be cancelled once the leather or fabric has been cut. Additionally, our hospitality products are highly customized and are generally not cancellable.

 

7

Working Capital Practices

 

Inventory: We generally import casegoods inventory and certain upholstery items in amounts that enable us to meet the delivery requirements of our customers, our internal in-stock goals and minimum purchase requirements from our sourcing partners. However, during fiscal 2019 and 2020 we accelerated the delivery and subsequently increased inventory levels of some imported products from China due to the threat of the 10% tarifftariffs on those products and the threat of subsequent increased tariffs. However, a large percentage of products sold are not warehoused by us but ship directly to our customers and thus not included as inventory. We do not carry significant amounts of domestically produced upholstery inventory or hospitality products, as most of these products are built to order and are shipped shortly after their manufacture.

7

Table of Contents

 

Accounts receivable: Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, which consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. For qualified customers, we offer payment terms, generally requiring payment 30 days from shipment. However, we may offer extended payment terms in certain circumstances, including to promote sales of our products.product. Due to the COVID-19 crisis in the U.S. and the related decline in demand for home furnishings that began in the first quarter of fiscal 2021, some customers have informed us that they intend to take extended credit terms of 60-120 days. We purchase accounts receivable insurance on certain customers or factor their receivables if their risk profile warrants it and the insurance is available. Due to the highly-customized nature of our hospitality products, we typically require a 50% deposit with order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer.

 

Accounts payable: Payment for our imported products warehoused first in Asia is due ten to fourteen days after our quality audit inspections are complete and the vendor invoice is presented. Payment for goods which are shipped to our US warehouses or container direct to our customers FOB Origin is generally due upon proof of lading onto a US-bound vessel and invoice presentation; however, payment terms, depending on the supplier, can stretch up to 45 days from invoice date. Payment terms for domestic raw materials and non-inventory related charges vary but are generally 30 days from invoice date.

 

Order Backlog

 

At February 3, 2019,2, 2020, our backlog of unshipped orders was as follows:

 

 

Order Backlog

  

Order Backlog

 
 

(Dollars in 000s)

  

(Dollars in 000s)

 
                                
 

February 3, 2019

  

January 28, 2018

  

February 2, 2020

  

February 3, 2019

 

Reporting Entity

 

Dollars

  

Weeks

  

Dollars

  

Weeks

  

Dollars

  

Weeks

  

Dollars

  

Weeks

 
                                

Hooker Branded

 $11,259   3.3  $15,189   4.7  $10,979   3.5  $11,259   3.3 

Home Meridian

  79,024   10.8   76,563   10.9   85,556   13.1   79,024   10.8 

Domestic Upholstery

  14,705   8.0   11,700   5.8 

All Other

  13,677   6.2   14,527   8.5   2,520   10.5   1,977   10.1 
                                

Consolidated

 $103,960   8.1  $106,279   8.9  $113,760   9.7  $103,960   8.1 

Order backlog increased $9.8 million or 9.4% as compared to the prior-year due to orders in the Home Meridian segment during the 2020 fiscal fourth quarter and due to the timing of orders received in the Domestic Upholstery segment for two major customers near the end of fiscal 2020.

 

For the Hooker Branded segment, Domestic Upholstery segment and All Other, we consider unshipped order backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies (discussed under Warehousing and Distribution, above), we do not consider order backlogs to be a reliable indicator of expected long-term sales. We consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period. Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass, club and mega account channels of distribution, (iii) the customproprietary nature of many of its products and (iv) the project nature of its hospitality business, that segment’s average order sizes tend to be larger and consequently, its order backlog tends to be larger. However, due to the order and supply disruptions caused by COVID-19, a spike in order cancellations in early fiscal 2021 has decreased the usefulness of order backlog at February 2, 2020 as an indicator of future sales.

8

 

Seasonality

 

Generally, sales in our fiscal first quarter are lower than our other fiscal quarters due to the post-Chinese New Year shipping lag and sales in our fiscal fourth quarter are generally stronger due to the pre-Chinese New Year surge in shipments from Asia and the product introduction schedule of a major customer.

 

EnvironmentalPart II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

41

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

41

Item 9A.

Controls and Procedures

42

Item 9B.

Other Information

42

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

43

Item 11.

Executive Compensation

43

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accounting Fees and Services

43

Part IV

Item 15.

Exhibits, Financial Statement Schedules

44

Item 16.

Form 10-K Summary

46

Signatures

47

Index to Consolidated Financial Statements

F-1


All references to 2020, 2019, 2018, 2017and 2016 or other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31, with fiscal 2020 ending on February 2, 2020. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 2019 fiscal year that ended on February 3, 2019 was a 53-week fiscal year.

All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery Segment including Bradington-Young, Sam Moore, and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands.

During fiscal 2018, we acquired substantially all of the assets and assumed certain liabilities of Shenandoah Furniture, Inc. The results of operations of Shenandoah are included in our results beginning on September 29, 2017 (the date of the acquisition). Consequently, prior-year information before September 29, 2017 for Shenandoah is not included in the financial statements presented in this report.References in this document to “SFI” refer to the counterparties to the asset purchase agreement, Shenandoah Furniture, Inc. and its two former shareholders, entered into on September 6, 2017. References in this document to “Shenandoah” or “Shenandoah Furniture” refer to the business operations of SFI acquired by us on September 29, 2017.

Forward-Looking Statements

Certain statements made in this report, including statements under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to:

 

As a part

The effect and consequences of the coronavirus (COVID-19) pandemic or future pandemics on matters including U.S. and local economies; our business operations and continuity; the health and productivity of our manufacturing sites generate both non-hazardousemployees; and hazardous wastes; the treatment, storage, transportation and disposal of which are subject to various local, state and national laws relating to environmental protection. Our policy is to record monitoring commitments and environmental liabilities when expenses are probable and can be reasonably estimated. The costs associated with our environmental responsibilities, compliance with federal, state and local laws regulating the discharge of materials into the environment, or costs otherwise relating to the protection of the environment, have not had and are not expected to have a material effectimpact on our financial position, results of operations, capital expendituressupply chain and customer base;

general economic or competitive position.

Employees

As of February 3, 2019, we had 1,263 full-time employees, of which 235 were employed in our Hooker Branded segment, 387 were employed in our Home Meridian segment and 641 were employed in All Other. None of our employees are represented by a labor union. We consider our relations with our employees to be good.

Patents and Trademarks

The Hooker Furniture, Bradington-Young, Sam Moore, Pulaski Furniture, Samuel Lawrence Furniture, Samuel Lawrence Hospitality, Room Gear, Right2Home, Home Meridian International, Prime Resources International, Accentrics Home, Shenandoah, H Contract, and MARQ trade names represent many years of continued business.  We believe these trade names are well-recognized and associated with quality and service in the furniture industry.  We also own a number of patents and trademarks,business conditions, both domestically and internationally, none of which is considered to be material. 

Governmental Regulations

Our company is subject to U.S. federal, state and local laws and regulationsinstability in the areas of safety, health, employmentfinancial and environmental pollution controls, as well as U.S. and international trade laws and regulations. We are also subject to foreign laws and regulations. In the past, compliance with these laws and regulations has not had any material effectcredit markets, including their potential impact on our earnings, capital expenditures,(i) sales and operating costs and access to financing or competitive position in excess of those affecting others in our industry; however,(ii) customers and suppliers and their ability to obtain financing or generate the effect of compliance in the future cannot be predicted. We believe we are in material compliance with applicable U.S. and international laws and regulations.

Additional Information

You may visit us online at hookerfurniture.com, bradington-young.com, sammoore.com, homemeridian.com, pulaskifurniture.com, slh-co.com, and hcontractfurniture.com. We make available, free of charge through our Hooker Furniture website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendmentscash necessary to those reports, and other documents as soon as practical after they are filed with or furnished to the Securities and Exchange Commission. A free copy of our annual report on Form 10-K may also be obtained by contacting Robert W. Sherwood, Vice President - Credit, Secretary and Treasurer at BSherwood@hookerfurniture.com or by calling 276-632-2133.

ITEM 1A. RISK FACTORS

Our business is subject to a variety of risks. The risk factors discussed below should be considered in conjunction with the other information contained in this annual report on Form 10-K. If any of these risks actually materialize, our business, results of operations, financial condition or future prospects could be negatively impacted. These risks are not the only ones we face. There may be additional risks that are presently unknown to us or that we currently believe to be immaterial that could affect us.

We rely on offshore sourcing from Vietnam and China for most of our sales. Consequently:

Recently enacted tariffs and potential future increases in tariffs on manufactured goods imported from China could adversely affect our business.conduct their respective businesses;

 

Effective September 24, 2018,

adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, such as the current U.S. administration imposedimposing a 10%25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for additional or increased tariffs originally scheduled to increase to 25% in 2019. In December, the President agreed to suspend further trade action for 90 daysfuture;

sourcing transitions away from China, including the lack of adequate manufacturing capacity and in February 2019 to further suspend trade action, to continue negotiationsskilled labor and to leave the tariff at the 10% rate for the time being. In fiscal 2019, 44% of our imported purchases were from China. Inability to reduce product costs, pass through price increases or find other suitable manufacturing sources outside of China may have a material adverse impact on sales volume, earnings and liquidity. In addition, the tariffs, and our responses to the tariffs, may cause our products to become less competitivelonger lead times, due to price increases or less profitable due to lower margins. Our inability to effectively managecompetition and increased demand for resources in those countries;

risks associated with our reliance on offshore sourcing and the negative impactscost of changing U.S.imported goods, including fluctuation in the prices of purchased finished goods, ocean freight costs and foreign trade policieswarehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our business and financial results.ability to timely fill customer orders;

 

We are subject to changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products.

Changes in political, economic, and social conditions, as well as in the laws and regulations in the foreign countries from which we source our products could adversely affectproducts;

disruptions involving our sales, earnings, financial conditionvendors or the transportation and liquidity. These changes could make it more difficult to provide products and service to our customers or could increase the cost ofhandling industries, particularly those products. International trade regulations and policies of the United States and the countries from which we source finished products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports affecting our products could increase our costs and decrease our earnings. For example, the U.S. Department of Commerce imposes tariffs on wooden bedroom furniture coming into the United States from China. In this case, none of the rates imposed have been of sufficient magnitude to alter our import strategy in any meaningful way; however, these and other tariffs are subject to review and could be increased or new tariffs implemented in the future.

A disruption in supply from Vietnam or China or from our most significant Vietnamese or Chinese suppliers could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.

In fiscal 2019, imported products sourced from Vietnam and China, accounted for nearly all of our import purchases and our top five suppliers in Vietnam and China account for approximately half of our fiscal 2019 import purchases. Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subject to the risk of losses arising from explosions and fires. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. If such a disruption were to occur, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Virginia, North Carolina and California to adequately meet demand for several months or slightly longer with an additional month’s worth of demand available for immediate shipment from our warehouses in Asia. We believe we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to six months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity.

Increased freight costs on imported products could decrease earnings and liquidity.

Ocean freight costs on imported products currently represent a significant portion of the cost of our imported products. Ocean freight rates on our imported products remain near historical lows due to a myriad of factors including sluggish global growth, low petroleum prices and overcapacity among ocean freight carriers. While we believe ocean freight rates are at or near the lower range of possible costs, we are unable to predict how much longer these low rates will persist. Increased rates in the future would likely adversely affect earnings, financial condition and liquidity.

Our dependence on non-owned suppliers could, over time, adversely affect our ability to service customers.

We rely heavily on suppliers we do not own or control, including a large number of non-US suppliers. All of our suppliers may not provide goods that meet our quality, design or other specifications in a timely manner and at a competitive price. If our suppliers do not meet our specifications, we may need to find alternative suppliers, potentially at a higher cost, or may be forced to discontinue products. Also, delivery of goods from non-U.S. suppliers may be delayed for reasons not typically encountered for domestically manufactured furniture, such as shipment delays caused by customs issues, labor issues, port-related issues such as weather, congestionstoppages, strikes or port equipment, decreasedslowdowns and the availability of shipping containers and/or the inability to secure space aboard shipping vessels to transport our products. Our failure to timely fill customer orders due to an extended business interruption for a major supplier, or due to transportation issues, could negatively impact existing customer relationships and adversely affect our sales, earnings, financial condition and liquidity.

Our inability to accurately forecast demand for our imported products could cause us to purchase too much, too little or the wrong mix of inventory.cargo ships;

 

Manufacturing and delivery lead times

difficulties in forecasting demand for our imported products necessitate that we make forecasts and assumptions regarding current and future demand for these products. If our forecasts and assumptions are inaccurate, we may purchase excess or insufficient amounts of inventory. If we purchase too much or the wrong mix of inventory, we may be forced to sell it at lower margins, which could adversely affect our sales, earnings, financial condition and liquidity. If we purchase too little or the wrong mix of inventory, we may not be able to fill customer orders and may lose market share and weaken or damage customer relationships, which also could adversely affect our sales, earnings, financial condition and liquidity.

Changes in the value of the U.S. Dollar compared to the currencies for the countries from which we obtain our imported products could adversely affect our sales, earnings, financial condition and liquidity.products;

 

For imported

risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products we generally negotiate firm pricing with our foreign suppliers in U.S. Dollars, typically for periods of at least one year. We accept the exposureand costs related to exchange rate movements beyond these negotiated periods. We do not use derivative financial instrumentsdefective or non-compliant products, including product liability claims and costs to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we must pay for imported products beyond the negotiated periods. These price changes could decrease our sales, earnings, financial condition and liquidity during affected periods.

Supplier transitions, including cost or quality issues, could result in longer lead times and shipping delays.recall defective products;

 

In

disruptions and damage (including due to weather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in Vietnam and China;

risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the past, inflation concerns,prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs;

the risks specifically related to the concentrations of a lesser extent quality and supplier viability concerns, affecting somematerial part of our imported product suppliers locatedsales and accounts receivable in China prompted usonly a few customers;

our inability to source more of our products from lower cost suppliers located in other countries, such as Vietnam. As conditions dictate, we could be forcedcollect amounts owed to make similar transitions in the future. When undertaken, transitions of this type involve significant planning and coordination by and between us and our new suppliers in these countries. Despite our best efforts and those of our new sourcing partners, these transition efforts are likely to result in longer lead times and shipping delays over the short term, which could adversely affect our sales, earnings, financial condition and liquidity.us;

 

The

the interruption, inadequacy, security breaches or securityintegration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance could adversely impact our business,sales, earnings, financial condition and liquidity.

Our information systems (software) and information technology (hardware) infrastructure platforms and those of third parties who provide these services to us, including internet service providers and third-parties who store data for us on their servers (“the cloud”), facilitate and support every facet of our business, including the sourcing of raw materials and finished goods, planning, manufacturing, warehousing, customer service, shipping, accounting, payroll and human resources. Our systems, and those of third parties who provide services to us, are vulnerable to disruption or damage causedrisks not covered by a variety of factors including, but not limited to: power disruptions or outages; natural disasters or other so-called “Acts of God”; computer system or network failures; viruses or malware; physical or electronic break-ins; the theft of computers, tablets and smart phones utilized by our employees or contractors; unauthorized access, phishing and cyber-attacks. The risk of cyberattacks also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a cybersecurity program designed to protect and preserve the integrity of our information systems. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition. Additionally, while we carry cyber insurance, including insurance for social engineering fraud, the amounts of insurance we carry may be inadequate due either to inadequate limits available from the insurance markets or inadequate coverage purchased. Because cyber threat scenarios are inherently difficult to predict and can take many forms, cyber insurance may not cover certain risks. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our information systems or to manage the information systems of third parties to accommodate these changes. If these information systems or technologies are interrupted or fail, or we are unable to adapt our systems or those of third parties as a result of legislative or regulatory actions, our operations and reputation may be adversely affected, we may be subject to legal proceedings, including regulatory investigations and actions, which could diminish investor and customer confidence which could adversely affect our sales, earnings, financial condition and liquidity.

A material part of our sales and accounts receivable are concentrated in a few customers. The loss of several large customers through business consolidations, failures or other reasons could adversely affect our business.

Although no customer accounted for more than 10% of our consolidated sales in fiscal 2019, our top five customers accounted for nearly one-third of our fiscal 2019 consolidated sales. Nearly half of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity. The loss of any one or more of these customers could adversely affect our sales, earnings, financial condition and liquidity. The loss of several of our major customers through business consolidations, failures or otherwise, could adversely affect our sales, earnings, financial condition and liquidity and the resulting loss in sales may be difficult or impossible to replace. Amounts owed to us by a customer whose business fails, or is failing, may become uncollectible, and we could lose future sales, any of which could adversely affect our sales, earnings, financial condition and liquidity.

We may not be able to collect amounts owed to us.

We grant payment terms to most customers ranging from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. Some of our customers have experienced, and may in the future experience, credit-related issues. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment. Should more customers than we anticipate experience liquidity issues, or if payment is not received on a timely basis, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity.

Unauthorized disclosure of confidential information provided to us by our customers, employees, or third parties could harm our business.

We rely on the internet and other electronic methods to transmit confidential information and we store confidential information on our networks. If there was a disclosure of confidential information by our employees or contractors, including accidental loss, inadvertent disclosure or unapproved dissemination of information, or if a third party were to gain access to the confidential information we possess, our reputation could be harmed, and we could be subject to civil or criminal liability and regulatory actions. A claim that is brought against us, successful or unsuccessful, that is uninsured or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings, financial condition and liquidity.

Our sales and operating results could be adversely affected by product safety concerns.

If our product offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to regulatory enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns or failure to prevail in private litigation against us could negatively affect our business, sales, earnings, financial condition and liquidity.

We incurred significant debt to provide permanent financing for the Shenandoah acquisition and HMI acquisition.

We borrowed $60 million for the Home Meridian acquisition in fiscal year 2017 and additional $12 million for the Shenandoah acquisition in fiscal year 2018 with term loans. Principal and interest payments on the borrowed funds were $19.3 million in fiscal 2019 and are expected to be $6.3 million in fiscal 2020 (assuming no interest rate changes).We are subject to interest rate volatility due to the variable interest rates on these term loans. Among other risks, our debt:

may limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt;

will require a portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of cash flows to fund working capital, capital expenditures, dividend payments and other general corporate purposes;

may result in higher interest expense in the event of increases in market interest rates for both long-term debt as well as any borrowings under our line of credit at variable rates; and

may require that additional terms, conditions or covenants be placed on us.insurance;

 

We may engage in

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, and investments in companies, formrestructurings, strategic alliances and pursue new business lines. These activities could disrupt our business, dilute our earnings per share, decreaseinternational operations;

higher than expected employee medical and workers’ compensation costs that may increase the valuecost of our common stockhigh-deductible healthcare and decrease our earnings and liquidity.workers compensation plans;

 

We may acquire or invest in businesses such as those that offer complementary products and that we believe offer competitive advantages. However, we may fail

product liability claims;

risks related to identify significant liabilities or risks that could negatively affect us or result in our paying more for the acquired company or assets than they are worth. We may also have difficulty assimilating and integrating the operations and personnel of an acquired business into our current operations. Acquisitions may disrupt or distract management from our ongoing business. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share and decrease the value of our common stock. We may pursue new business lines in which we have limited or no prior experience or expertise. These pursuits may require substantial investment of capital and personnel. New business initiatives may fail outright or fail to produce an adequate return, which could adversely affect our earnings, financial condition and liquidity.

A disruption affecting our domestic facilities could disrupt our business.

The warehouses in which we store our inventory in Virginia, North Carolina and California are critical to our success. Our corporate and divisional headquarters, which house our administration, sourcing, sales, finance, merchandising, customer service and logistics functions for our imported and domestic products are located in Virginia and North Carolina. Our domestic upholstery manufacturing facilities are located in Virginia and North Carolina. Any disruption affecting our domestic facilities, for even a relatively short period of time, could adversely affect our ability to ship our imported furniture products and disrupt our business, which could adversely affect our sales, earnings, financial condition and liquidity.

Our recently terminated pension plan could negatively impact our operating results and cash flows.

We assumed the liabilities of the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees upon completion of the Home Meridian acquisition on February 1, 2016. No benefits have accrued under the Pension Plan since it was frozen in March 1995. During the fiscal 2019 third quarter, we fully funded the plan by making a $3 million cash contribution as part of a Pension Plan de-risking strategy and moved assets into generally lower risk investments to preserve asset value. On January 30, 2019, our Board of Directors approved the termination of the Pension Plan. Pension Plan termination is an eighteen to twenty-four-month process that involves seeking certain approvals from both the IRS and the PBGC. We expect to record pension settlement expenses which could adversely affect our earnings. Additionally, there could be excess costs to terminate the plan and market performance could drive down the value of our fixed-income investments, which could cause the Pension Plan to lose its funded status and require us to make additional cash contributions, which could negatively affect our earnings and liquidity. See Note 13 on page F-27 for additional information about the Pension Plan.

Our other defined benefit retirement plan obligations could negatively impact our operating results and cash flows.

We maintain two other defined benefit pension plans (the “Plans”):

a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation; and

the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives, assumed upon completion of the Home Meridian acquisition on February 1, 2016.plans;

 

The recognition of costs and liabilities associated with these plans for financial reporting purposes is affected by assumptions made by management and used by actuaries engaged by us to calculate

the benefit obligations and the expenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the future. The assumptions that have the most significant impact on reported results are (i) the discount rate and (ii) mortality rates.

While the plans are frozen and no new participants are being added, we expect to be impacted by changes in actuarial assumptions of both plans, which could adversely affect our financial condition and liquidity. See Note 13 on page F-27 for additional information about the Plans.

Failure to anticipate or timely respond to changes in fashion and consumer tastes could adversely impact our business.

Furniture is a styled product and is subject to rapidly changing fashion trends and consumer tastes, as well as to increasingly shorter product life cycles. If we fail to anticipate or promptly respond to these changes we may lose market share or be faced with the decision of whether to sell excess inventory at reduced prices. This could adversely affect our sales, earnings, financial condition and liquidity.

Fluctuations in the price, availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase our costs.

We use various types of wood, leather, fabric, foam and other filling material, high carbon spring steel, bar and wire stock and other raw materials in manufacturing upholstered furniture. We depend on outside suppliers for raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at acceptable prices and in a timely manner. We do not have long-term supply contracts with our suppliers. Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers. We may not always be able to pass price increases in raw materials through to our customers due to competition and other market pressures. The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings, financial condition and liquidity.

If demand for our domestically manufactured upholstered furniture declines, we may respond by realigning manufacturing.

Our domestic manufacturing operations make only upholstered furniture. A decline in demand for our domestically produced upholstered furniture could result in the realignment of our domestic manufacturing operations and capabilities and the implementation of cost-saving measures. These programs could include the consolidation and integration of facilities, functions, systems and procedures. We may decide to source certain products from other suppliers instead of continuing to manufacture them. These realignments and cost-saving measures typically involve initial upfront costs and could result in decreases in our near-term earnings before the expected cost savings are realized, if they are realized at all. We may not always accomplish these actions as quickly as anticipated and may not achieve the expected cost savings, which could adversely affect our sales, earnings, financial condition and liquidity.

We may experiencepossible impairment of our long-lived assets, which would decrease ourcan result in reduced earnings and net worth.worth;

 

At February 3, 2019, we had $105.3 million in net long-lived assets, consisting primarily of property, plant

capital requirements and equipment, trademarks, trade names and goodwill. Our goodwill, some trademarks and tradenames have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but are tested for impairment annually or more frequently if events or circumstances indicate thatcosts, including the asset might be impaired. Our definite-lived assets consist of property, plant and equipment and certain intangible assets related to our recent acquisitions and are tested for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. The outcome of impairment testing could result in the write-down of all or a portion of the value of these assets. A write-downservicing of our assets would, in turn, reduce our earningsfloating-rate term loans;

risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

the cost and net worth. See Notes 9difficulty of marketing and 10 for additional information.

We may not be able to maintain or raise prices in response to inflation and increasing costs.

Competitive and market forces could prohibit future successful price increases forselling our products in order to offset increased costsforeign markets;

changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of finished goods,our imported products and raw materials, freight and other product-related costs, which could adversely affect our sales, earnings, financial condition and liquidity.materials;

 

Economic downturns could result in decreased sales, earnings and liquidity.

Thethe cyclical nature of the furniture industry, which is particularly sensitive to cyclical variationschanges in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;

price competition in the general economyfurniture industry;

competition from non-traditional outlets, such as internet and to uncertainty regarding future economic prospects. Home furnishings are generally considered a postponable purchase by most consumers. Economic downturns could affectcatalog retailers; and

changes in consumer spending habits by decreasing the overallpreferences, including increased demand for home furnishings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, the availability of consumer credit and broader national or geopolitical factors have particularly significant effects on our business. A recovery in our sales could lag significantly behind a general recovery in the economy after an economic downturn,lower-quality, lower-priced furniture due to, among other things, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the postponable nature and relatively significant costavailability of home furnishings purchases. These events could also impact retailers, our primary customers, possibly adversely affecting our sales, earnings, financial condition and liquidity.consumer credit.

We may lose market share due to competition.

The furniture industry is very competitive and fragmented. We compete with numerous domestic and non-U.S. residential furniture sources. Some competitors have greater financial resources than we have and often offer extensively advertised, well-recognized, branded products. Competition from non-U.S. sources has increased dramatically over the past decade. We may not be able to meet price competition or otherwise respond to competitive pressures, including increases in supplier and production costs. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to continue to differentiate our products (through value and styling, finish and other construction techniques) from those of our competitors. In addition, some large furniture retailers are sourcing directly from non-U.S. furniture factories. Over time, this practice may expand to smaller retailers. As a result, we are continually subject to the risk of losing market share, which could adversely affect our sales, earnings, financial condition and liquidity.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

 

Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” below.

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

4

We may incur higher employee costs in the future.

We maintain self-insured healthcare and workers compensation plans for our employees. We have insurance coverage in place for aggregate claims above specified amounts in any year for both plans. Our healthcare costs in recent years have generally increased at the same rate or greater than the national average, and healthcare costs have increased more rapidly than general inflation in the U.S. economy. Continued inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Our workers compensation claims costs have had only a modest impact on our overall results of operations for quite some time; however, these costs may increase in the future without warning. Continued increases in our healthcare costs and increased workers compensation claims costs could adversely affect our earnings, financial condition and liquidity.

Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.

Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect to demand for our home furnishing products. Accordingly, our results of operations for any quarter are not necessarily indicative of the results of operations to be expected for a full year.

Future costs of complying with various laws and regulations may adversely impact future operating results.

Our business is subject to various domestic and international laws and regulations that could have a significant impact on our operations and the cost to comply with such laws and regulations could adversely impact our sales, earnings, financial condition and liquidity. In addition, failure to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact our operations and reputation.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

Set forth below is information with respect to our principal properties at April 19, 2019. We believe all of these properties are well-maintained and in good condition. During fiscal 2019, we estimate our upholstery plants operated at approximately 86% of capacity on a one-shift basis. All our production facilities are equipped with automatic sprinkler systems. All facilities maintain modern fire and spark detection systems, which we believe are adequate. We have leased certain warehouse facilities for our distribution and import operations, typically on a short or medium-term basis. We expect that we will be able to renew or extend these leases or find alternative facilities to meet our warehousing and distribution needs at a reasonable cost. All facilities set forth below are active and operational, representing approximately 3.9 million square feet of owned space, leased space or properties utilized under third-party operating agreements.

Location

Segment Use

Primary Use

Approximate Size in

Square Feet

Owned or Leased

Martinsville, Va.

All segments

Corporate Headquarters

43,000

Owned

Martinsville, Va.

HB, AO

Distribution and Imports

580,000

Owned

Martinsville, Va.

HB, AO

Customer Support Center

146,000

Owned

Martinsville, Va.

HB, AO

Distribution

628,000

Leased

High Point, N.C.

HB, AO

Showroom

80,000

Leased

Cherryville, N.C.

AO

Manufacturing Supply Plant

53,000

Owned

Hickory, N.C.

AO

Manufacturing

91,000

Owned

Hickory, N.C.

AO

Manufacturing and Offices

36,400

Leased

Bedford, Va.

AO

Manufacturing and Offices

327,000

Owned

High Point, N.C.

HM

Showroom

92,750

Leased

High Point, N.C.

HM

Office

23,796

Leased

High Point, N.C.

HM

Warehouse

10,400

Leased

Madison, N.C.

HM

Warehouse

500,000

Leased

Mayodan, N.C.

HM

Warehouse

235,144

Leased

Mayodan, N.C.

HM

Warehouse

200,000

Leased

Redlands, CA.

HM

Warehouse

327,790

Leased

Ho Chi Minh City, VN

HM

Office and Warehouse

4,893

Leased

Haining, China

HM

Warehouse

5,920

Leased

Haining, China

HM

Office

1,690

Leased

Dongguan, China

HM

Office

1,571

Leased

Dongguan, China

HB

Office

1,855

Leased

Thu Dau Mot, VN

HB

Office

1,722

Leased

Valdese, N.C.

AO

Manufacturing and warehousing

102,905

Leased

Mt. Airy, N.C.

AO

Manufacturing and warehousing

104,150

Leased

Martinsville, Va.

AO

Manufacturing and warehousing

92,766

Leased

High Point, N.C.

AO

Office

18,346

Leased

HB=Hooker Branded, HM=Home Meridian, AO=All Other

Set forth below is information regarding principal properties we utilize that are owned and operated by third parties.

Location

Segment Use

Primary Use

Approximate Size in Square Feet

Guangdong, China

HB

Distribution

210,000

Ho Chi Minh City, VN

HB

Distribution

25,000

ITEM 3.     LEGAL PROCEEDINGS

None.

ITEM 4.     MINE SAFETY DISCLOSURES

None.

EXECUTIVE OFFICERS OF

HOOKER FURNITURE CORPORATION

Hooker Furniture’s executive officers and their ages as of April 19, 2019 and the calendar year each joined the Company are as follows:

Name

 

Age

 

Position

 

Year Joined Company

Paul B. Toms, Jr.

 

64

 

Chairman and Chief Executive Officer

 

1983

Paul A. Huckfeldt

 

61

 

Chief Financial Officer and

 

2004

 

 

 

 

   Senior Vice President - Finance and Accounting

 

 

Anne M. Jacobsen

 

57

 

Chief Administration Officer

 

2008

D. Lee Boone

 

56

 

Co-President - Home Meridian Segment

 

2016

Michael W. Delgatti, Jr.

 

65

 

President - Hooker Domestic Upholstery & Emerging Channels

 

2009

Jeremy R. Hoff

 

45

 

President - Hooker Branded Segment

 

2017

Douglas Townsend

 

52

 

Co-President - Home Meridian Segment

 

2016

Paul B. Toms, Jr. has been Chairman and Chief Executive Officer since December 2000 and also served as President for most of the period from November 2006 to August 2011. Mr. Toms was President and Chief Operating Officer from December 1999 to December 2000, Executive Vice President - Marketing from 1994 to December 1999, Senior Vice President - Sales and Marketing from 1993 to 1994, and Vice President - Sales from 1987 to 1993. Mr. Toms joined the Company in 1983 and has been a Director since 1993.

Paul A. Huckfeldt has been Senior Vice President - Finance and Accounting since September 2013 and Chief Financial Officer since January 2011. Mr. Huckfeldt served as Vice President – Finance and Accounting from December 2010 to September 2013, Corporate Controller and Chief Accounting Officer from January 2010 to January 2011, Manager of Operations Accounting from March 2006 to December 2009 and led the Company’s Sarbanes-Oxley implementation and subsequent compliance efforts from April 2004 to March 2006.

Anne M. Jacobsen has been Chief Administration Officer since July 2018. Ms. Jacobsen served as Senior Vice President – Administration from January 2014 to June 2018, Vice President- HR and Administration from January 2011 to January 2014 and Vice President-Human Resources from November 2008 to January 2011. Ms. Jacobsen joined the Company in January of 2008 as Director of Human Resources.

D. Lee Boone has been Co-President of the Home Meridian Segment since June 2018. Mr. Boone joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016 as President of Samuel Lawrence Furniture, a division of Home Meridian International. Prior to that, Mr. Boone served as President of Legacy Classic Furniture from 2006 to 2012.

Michael W. Delgatti, Jr. has been President of Hooker Domestic Upholstery and Emerging Channel since April 2018. Mr. Delgatti served as President- Hooker Furniture Corporation from February 2014 to January 2017, President – Hooker Upholstery from August 2011 to January 2014 and Executive Vice-President of Corporate Sales from September 2012 to January 2014. Mr. Delgatti joined the Company in January of 2009 as Executive Vice-President of Hooker Upholstery.

Jeremy R. Hoff has been President of the Hooker Branded Segment since April 2018. Mr. Hoff joined the Company in August of 2017 as President of Hooker Upholstery. Prior to that, Mr. Hoff served as President of Theodore Alexander USA from December 2015 to August 2017 and Senior Vice President of sales at A.R.T. Furniture Inc. from April 2015 to November 2015 and Vice-President of Sales from March 2011 to April 2015.

Douglas Townsend has been Co-President of the Home Meridian Segment since June 2018. Mr. Townsend joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016 as Senior Vice President of U.S. Operations and Chief Operating Officer of both Samuel Lawrence Hospitality and the Clubs Division.  Prior to the acquisition, he was Executive Vice President of Home Meridian International from October 2011 to February 2016.

 

Hooker Furniture Corporation

Part I

ITEM 1.     BUSINESS

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2018 shipments to U.S. retailers, according to a 2019 survey by a leading trade publication.

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins.

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer, has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically-produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

Reportable Segments

Furniture sales account for all of our net sales. For financial reporting purposes and as described further below, we are organized into three reportable segments, Hooker Branded, Home Meridian and Domestic Upholstery. Our other businesses are aggregated into “All Other”. See Note 18 to our consolidated financial statements for additional financial information regarding our operating segments.

Products

Our product lines cover the design spectrum of residential furniture: traditional, contemporary and transitional. Further, our product lines are in the “good”, “better” and “best” product categories, which carry medium and upper price points and consist of:

The Hooker Branded segment which includes two businesses:

Hooker Casegoods, which covers a wide range of design categories and includes home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand; and

Hooker Upholstery, imported upholstered furniture targeted at the upper-medium price-range.

The Home Meridian segment which includes the following brands/marketing units:

Accentrics Home, home furnishings centered around an eclectic mix of unique pieces and materials that offer a fresh take on home fashion;

Pulaski Furniture, casegoods covering the complete design spectrum in a wide range of bedroom, dining room, accent and display cabinets at medium price points;

Samuel Lawrence Furniture, value-conscious offerings in bedroom, dining room, home office and youth furnishings;

Prime Resources International, value-conscious imported leather motion upholstery;

Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings targeted toward four and five-star hotels, and

HMidea, 2019 start-up that provides better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers.

The Domestic Upholstery segment which includes the following operations:

Bradington-Young, a seating specialist in upscale motion and stationary leather furniture;

Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization; and

Shenandoah Furniture, an upscale upholstered furniture business specializing in private label sectionals, modulars, sofas, chairs, ottomans, benches, beds and dining chairs in the upper-medium price points for lifestyle specialty retailers.

All Other consisting of:

The H Contract product line which supplies upholstered seating and casegoods to upscale senior living and assisted living facilities through designers, design firms, industry dealers and distributors that service that market; and

Lifestyle Brands, a business started in fiscal 2019 targeted at the interior designer channel.

Sourcing

Imported Products

We have sourced products from foreign manufacturers for nearly thirty years, predominantly from Asia. Imported casegoods and upholstered furniture together accounted for approximately 83% of our net sales in fiscal 2020, 84% of our net sales in fiscal 2019, and 87% of our net sales in fiscal 2018.

Our imported furniture business is subject to inherent risks in importing products manufactured abroad, including, but not limited to, supply disruptions and delays due to a variety of reasons, including due to the coronavirus (COVID-19) pandemic and possible similar health-related issues, currency exchange rate fluctuations, transportation-related issues, economic and political developments and instability, as well as the laws, policies and actions of foreign governments and the United States. These laws, policies and actions may include regulations affecting trade or the application of tariffs, much like the current U.S. administration’s imposition of an initial 10% tariff in September 2018 that increased to 25% in May 2019 on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China during fiscal 2019 and 2020. In response to these tariffs, we began re-sourcing products from non-tariff countries, primarily Vietnam, and reduced our Chinese imports by about half by the end of fiscal 2020.

Because of the large number and diverse nature of the foreign suppliers from which we source our imported products, we have flexibility in the sourcing of products among any particular supplier or country. However, a disruption in our supply chain from a major supplier or from Vietnam or China in general, could significantly compromise our ability to fill customer orders for products manufactured at that factory or in that country. Supply disruptions and delays on selected items could occur for six months or longer. If we were to be unsuccessful in obtaining those products from other sources or at a comparable cost, then a disruption in our supply chain from a major furniture supplier, or from Vietnam or China in general, could decrease our sales, earnings and liquidity. In early fiscal 2021 because of plant closures in China due to COVID-19, many of our Chinese suppliers were closed or operating at reduced capacity and we experienced some out of stocks on better selling items. We offered and sold available goods on hand and in transit but were unable to fully mitigate the entire sales loss from these out-of-stocks. These suppliers were in the process of returning to full capacity when the COVID-19 crisis hit the U.S. Consequently, some of these supplier locations are closing temporarily or reducing capacity. We expect outages in select products as a result.

Given the sourcing capacity available in China, Vietnam and other low-cost producing countries, we currently believe the risks from these potential supply disruptions are manageable, however, we have limited insight into the extent to which our business could be further impacted by COVID-19 and there are many unknowns including, how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. See Item 1A, “Risk Factors” for additional information on our risks related to imported products.

For imported products, we generally negotiate firm pricing with foreign suppliers in U.S. Dollars, typically for a term of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effects of any price increases from suppliers in the prices we charge for imported products. However, these price changes could adversely impact sales volume and profit margin during affected periods. Conversely, a relative increase in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could decrease the cost of imported products and favorably impact net sales and profit margins during affected period. However, due to other factors, such as inflationary pressure in China and other countries, we may not fully realize savings when exchange rates fall. Therefore, lower exchange rates may only have a tempering effect on future price increases by merely delaying cost increases on imported products. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

Raw Materials

Significant materials used in manufacturing our domestic upholstered furniture products include leather, fabric, foam, wooden and metal frames and electronic mechanisms. Most of the leather is imported from Italy, South America and China, and is purchased as full hides and cut and sewn in our facilities or is purchased as pre-cut and sewn kits processed by our vendors to our pattern specifications. We believe our sources for raw materials are adequate and that we are not dependent on any one supplier. However, we have seen some delays in some pre-cut and sewn kits imported from China as a result of COVID-19. Our five largest domestic upholstery suppliers accounted for 28% of our raw materials purchases for domestic upholstered furniture manufacturing operations in fiscal 2020. Should disruptions with this supplier occur, we believe we could successfully source these products from other suppliers without significant disruption to our operations.

Customers

Our home furnishings products are sold through a variety of retailers including independent furniture stores, department stores, mass merchants, national chains, warehouse clubs, catalog merchants, interior designers and e-commerce retailers. One customer accounted for approximately 11% of our consolidated sales in fiscal 2020. Our top five customers accounted for approximately 30% of our fiscal 2020 consolidated sales. The loss of any one or more of these customers would have a material adverse impact on our business. 1.6% of our sales in fiscal 2020 were to international customers, which we define as sales outside of the United States and Canada.

Competition

The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers and importers, none of which dominates the market in our price points. While the markets in which we compete include a large number of relatively small and medium-sized manufacturers, certain competitors have substantially greater sales volumes and financial resources than we do. U.S. imports of furniture produced overseas, such as from Vietnam and China, have stabilized in recent years. The primary competitive factors for home furnishings in our price points include price, style, availability, service, quality and durability. Competitive factors in the hospitality and contract furniture markets include product value and utility, lead times, on-time delivery and the ability to respond to requests for special and non-standard products. We believe our design capabilities, ability to import and/or manufacture upholstered furniture, product value, longstanding customer and supplier relationships, significant sales, distribution and inventory capabilities, ease of ordering, financial strength, experienced management and customer support are significant competitive advantages.

Warehousing and Distribution

We distribute furniture to retailers directly from factories and warehouses in Asia via our container direct programs and from our distribution centers in Virginia, North Carolina and California, and in limited cases, from customer operated warehouses in strategic locations. It is our policy and industry practice to allow order cancellation for casegoods up to the time of shipment or, in the case of container direct orders, up until the time the container is booked with the ocean freight carrier, therefore, customer orders for casegoods are not firm. However, domestically produced upholstered products are predominantly custom-built and consequently, cannot be cancelled once the leather or fabric has been cut. Additionally, our hospitality products are highly customized and are generally not cancellable.

Working Capital Practices

Inventory: We generally import casegoods inventory and certain upholstery items in amounts that enable us to meet the delivery requirements of our customers, our internal in-stock goals and minimumpurchase requirements from our sourcing partners. However, during fiscal 2019 and 2020 we accelerated the delivery and subsequently increased inventory levels of some imported products from China due to the threat of tariffs on those products and the threat of subsequent increased tariffs. However, a large percentage of products sold are not warehoused by us but ship directly to our customers and thus not included as inventory. We do not carry significant amounts of domestically produced upholstery inventory or hospitality products, as most of these products are built to order and are shipped shortly after their manufacture.

Accounts receivable: Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, which consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. For qualified customers, we offer payment terms, generally requiring payment 30 days from shipment. However, we may offer extended payment terms in certain circumstances, including to promote sales of our product. Due to the COVID-19 crisis in the U.S. and the related decline in demand for home furnishings that began in the first quarter of fiscal 2021, some customers have informed us that they intend to take extended credit terms of 60-120 days. We purchase accounts receivable insurance on certain customers or factor their receivables if their risk profile warrants it and the insurance is available. Due to the highly-customized nature of our hospitality products, we typically require a 50% deposit with order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer.

Accounts payable: Payment for our imported products warehoused first in Asia is due ten to fourteen days after our quality audit inspections are complete and the vendor invoice is presented. Payment for goods which are shipped to our US warehouses or container direct to our customers FOB Origin is generally due upon proof of lading onto a US-bound vessel and invoice presentation; however, payment terms, depending on the supplier, can stretch up to 45 days from invoice date. Payment terms for domestic raw materials and non-inventory related charges vary but are generally 30 days from invoice date.

Order Backlog

At February 2, 2020, our backlog of unshipped orders was as follows:

  

Order Backlog

 
  

(Dollars in 000s)

 
                 
  

February 2, 2020

  

February 3, 2019

 

Reporting Entity

 

Dollars

  

Weeks

  

Dollars

  

Weeks

 
                 

Hooker Branded

 $10,979   3.5  $11,259   3.3 

Home Meridian

  85,556   13.1   79,024   10.8 

Domestic Upholstery

  14,705   8.0   11,700   5.8 

All Other

  2,520   10.5   1,977   10.1 
                 

Consolidated

 $113,760   9.7  $103,960   8.1 

Order backlog increased $9.8 million or 9.4% as compared to the prior-year due to orders in the Home Meridian segment during the 2020 fiscal fourth quarter and due to the timing of orders received in the Domestic Upholstery segment for two major customers near the end of fiscal 2020.

For the Hooker Branded segment, Domestic Upholstery segment and All Other, we consider unshipped order backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies (discussed under Warehousing and Distribution, above), we do not consider order backlogs to be a reliable indicator of expected long-term sales. We consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period. Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass, club and mega account channels of distribution, (iii) the proprietary nature of many of its products and (iv) the project nature of its hospitality business, that segment’s average order sizes tend to be larger and consequently, its order backlog tends to be larger. However, due to the order and supply disruptions caused by COVID-19, a spike in order cancellations in early fiscal 2021 has decreased the usefulness of order backlog at February 2, 2020 as an indicator of future sales.

Seasonality

Generally, sales in our fiscal first quarter are lower than our other fiscal quarters due to the post-Chinese New Year shipping lag and sales in our fiscal fourth quarter are generally stronger due to the pre-Chinese New Year surge in shipments from Asia and the product introduction schedule of a major customer.

Part II

 

ITEM 5.          MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     

 

Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of February 3, 2019, we had approximately 5,700 beneficial shareholders. We currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.

 

Purchase

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities by the Issuer and Affiliated Purchasers

18

During the fiscal 2013 first quarter, our Board of Directors authorized the repurchase of up to $12.5 million of the Company’s common shares. No shares have been repurchased since fiscal 2013. Approximately $11.8 million remains available under the board’s authorization as of February 3, 2019. For additional information regarding this repurchase authorization, see the “Share Repurchase Authorization” section in Item 6.

Selected Financial Data

19

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations

20

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

41

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

41

Item 9A.

Controls and Procedures

42

Item 9B.

Other Information

42

Part III

Item 10.

Directors, Executive Officers and Corporate Governance

43

Item 11.

Executive Compensation

43

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

Item 13.

Certain Relationships and Related Transactions, and Director Independence

43

Item 14.

Principal Accounting Fees and Services

43

Part IV

Item 15.

Exhibits, Financial Statement Schedules

44

Item 16.

Form 10-K Summary

46

Signatures

47

Index to Consolidated Financial Statements

F-1


All references to 2020, 2019, 2018, 2017and 2016 or other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31, with fiscal 2020 ending on February 2, 2020. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 2019 fiscal year that ended on February 3, 2019 was a 53-week fiscal year.

All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery Segment including Bradington-Young, Sam Moore, and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands.

During fiscal 2018, we acquired substantially all of the assets and assumed certain liabilities of Shenandoah Furniture, Inc. The results of operations of Shenandoah are included in our results beginning on September 29, 2017 (the date of the acquisition). Consequently, prior-year information before September 29, 2017 for Shenandoah is not included in the financial statements presented in this report.References in this document to “SFI” refer to the counterparties to the asset purchase agreement, Shenandoah Furniture, Inc. and its two former shareholders, entered into on September 6, 2017. References in this document to “Shenandoah” or “Shenandoah Furniture” refer to the business operations of SFI acquired by us on September 29, 2017.

Forward-Looking Statements

Certain statements made in this report, including statements under Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to:

 

The effect and consequences of the coronavirus (COVID-19) pandemic or future pandemics on matters including U.S. and local economies; our business operations and continuity; the health and productivity of our employees; and the impact on our supply chain and customer base;

 

general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses;

adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, such as the current U.S. administration imposing a 25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for additional or increased tariffs in the future;

sourcing transitions away from China, including the lack of adequate manufacturing capacity and skilled labor and longer lead times, due to competition and increased demand for resources in those countries;

risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, ocean freight costs and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders;

changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products;

 

Performance Graph

disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;

difficulties in forecasting demand for our imported products;

risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products;

disruptions and damage (including due to weather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in Vietnam and China;

risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs;

the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers;

our inability to collect amounts owed to us;

the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance or risks not covered by cyber insurance;

achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

higher than expected employee medical and workers’ compensation costs that may increase the cost of our high-deductible healthcare and workers compensation plans;

product liability claims;

risks related to our other defined benefit plans;

the possible impairment of our long-lived assets, which can result in reduced earnings and net worth;

capital requirements and costs, including the servicing of our floating-rate term loans;

risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;

the cost and difficulty of marketing and selling our products in foreign markets;

changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials;

the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit;

price competition in the furniture industry;

competition from non-traditional outlets, such as internet and catalog retailers; and

changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” below.

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

Hooker Furniture Corporation

Part I

ITEM 1.     BUSINESS

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2018 shipments to U.S. retailers, according to a 2019 survey by a leading trade publication.

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins.

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer, has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically-produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

Reportable Segments

Furniture sales account for all of our net sales. For financial reporting purposes and as described further below, we are organized into three reportable segments, Hooker Branded, Home Meridian and Domestic Upholstery. Our other businesses are aggregated into “All Other”. See Note 18 to our consolidated financial statements for additional financial information regarding our operating segments.

Products

Our product lines cover the design spectrum of residential furniture: traditional, contemporary and transitional. Further, our product lines are in the “good”, “better” and “best” product categories, which carry medium and upper price points and consist of:

The Hooker Branded segment which includes two businesses:

Hooker Casegoods, which covers a wide range of design categories and includes home entertainment, home office, accent, dining and bedroom furniture in the upper-medium price points sold under the Hooker Furniture brand; and

Hooker Upholstery, imported upholstered furniture targeted at the upper-medium price-range.

The Home Meridian segment which includes the following graph compares cumulative total shareholder returnbrands/marketing units:

Accentrics Home, home furnishings centered around an eclectic mix of unique pieces and materials that offer a fresh take on home fashion;

Pulaski Furniture, casegoods covering the complete design spectrum in a wide range of bedroom, dining room, accent and display cabinets at medium price points;

Samuel Lawrence Furniture, value-conscious offerings in bedroom, dining room, home office and youth furnishings;

Prime Resources International, value-conscious imported leather motion upholstery;

Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings targeted toward four and five-star hotels, and

HMidea, 2019 start-up that provides better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers.

The Domestic Upholstery segment which includes the following operations:

Bradington-Young, a seating specialist in upscale motion and stationary leather furniture;

Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization; and

Shenandoah Furniture, an upscale upholstered furniture business specializing in private label sectionals, modulars, sofas, chairs, ottomans, benches, beds and dining chairs in the upper-medium price points for lifestyle specialty retailers.

All Other consisting of:

The H Contract product line which supplies upholstered seating and casegoods to upscale senior living and assisted living facilities through designers, design firms, industry dealers and distributors that service that market; and

Lifestyle Brands, a business started in fiscal 2019 targeted at the interior designer channel.

Sourcing

Imported Products

We have sourced products from foreign manufacturers for nearly thirty years, predominantly from Asia. Imported casegoods and upholstered furniture together accounted for approximately 83% of our net sales in fiscal 2020, 84% of our net sales in fiscal 2019, and 87% of our net sales in fiscal 2018.

Our imported furniture business is subject to inherent risks in importing products manufactured abroad, including, but not limited to, supply disruptions and delays due to a variety of reasons, including due to the coronavirus (COVID-19) pandemic and possible similar health-related issues, currency exchange rate fluctuations, transportation-related issues, economic and political developments and instability, as well as the laws, policies and actions of foreign governments and the United States. These laws, policies and actions may include regulations affecting trade or the application of tariffs, much like the current U.S. administration’s imposition of an initial 10% tariff in September 2018 that increased to 25% in May 2019 on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China during fiscal 2019 and 2020. In response to these tariffs, we began re-sourcing products from non-tariff countries, primarily Vietnam, and reduced our Chinese imports by about half by the end of fiscal 2020.

Because of the large number and diverse nature of the foreign suppliers from which we source our imported products, we have flexibility in the sourcing of products among any particular supplier or country. However, a disruption in our supply chain from a major supplier or from Vietnam or China in general, could significantly compromise our ability to fill customer orders for products manufactured at that factory or in that country. Supply disruptions and delays on selected items could occur for six months or longer. If we were to be unsuccessful in obtaining those products from other sources or at a comparable cost, then a disruption in our supply chain from a major furniture supplier, or from Vietnam or China in general, could decrease our sales, earnings and liquidity. In early fiscal 2021 because of plant closures in China due to COVID-19, many of our Chinese suppliers were closed or operating at reduced capacity and we experienced some out of stocks on better selling items. We offered and sold available goods on hand and in transit but were unable to fully mitigate the entire sales loss from these out-of-stocks. These suppliers were in the process of returning to full capacity when the COVID-19 crisis hit the U.S. Consequently, some of these supplier locations are closing temporarily or reducing capacity. We expect outages in select products as a result.

Given the sourcing capacity available in China, Vietnam and other low-cost producing countries, we currently believe the risks from these potential supply disruptions are manageable, however, we have limited insight into the extent to which our business could be further impacted by COVID-19 and there are many unknowns including, how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. See Item 1A, “Risk Factors” for additional information on our risks related to imported products.

For imported products, we generally negotiate firm pricing with foreign suppliers in U.S. Dollars, typically for a term of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effects of any price increases from suppliers in the prices we charge for imported products. However, these price changes could adversely impact sales volume and profit margin during affected periods. Conversely, a relative increase in the value of the U.S. Dollar compared to the currencies from which we obtain our imported products could decrease the cost of imported products and favorably impact net sales and profit margins during affected period. However, due to other factors, such as inflationary pressure in China and other countries, we may not fully realize savings when exchange rates fall. Therefore, lower exchange rates may only have a tempering effect on future price increases by merely delaying cost increases on imported products. See also Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”

Raw Materials

Significant materials used in manufacturing our domestic upholstered furniture products include leather, fabric, foam, wooden and metal frames and electronic mechanisms. Most of the leather is imported from Italy, South America and China, and is purchased as full hides and cut and sewn in our facilities or is purchased as pre-cut and sewn kits processed by our vendors to our pattern specifications. We believe our sources for raw materials are adequate and that we are not dependent on any one supplier. However, we have seen some delays in some pre-cut and sewn kits imported from China as a result of COVID-19. Our five largest domestic upholstery suppliers accounted for 28% of our raw materials purchases for domestic upholstered furniture manufacturing operations in fiscal 2020. Should disruptions with this supplier occur, we believe we could successfully source these products from other suppliers without significant disruption to our operations.

Customers

Our home furnishings products are sold through a variety of retailers including independent furniture stores, department stores, mass merchants, national chains, warehouse clubs, catalog merchants, interior designers and e-commerce retailers. One customer accounted for approximately 11% of our consolidated sales in fiscal 2020. Our top five customers accounted for approximately 30% of our fiscal 2020 consolidated sales. The loss of any one or more of these customers would have a material adverse impact on our business. 1.6% of our sales in fiscal 2020 were to international customers, which we define as sales outside of the United States and Canada.

Competition

The furniture industry is highly competitive and includes a large number of foreign and domestic manufacturers and importers, none of which dominates the market in our price points. While the markets in which we compete include a large number of relatively small and medium-sized manufacturers, certain competitors have substantially greater sales volumes and financial resources than we do. U.S. imports of furniture produced overseas, such as from Vietnam and China, have stabilized in recent years. The primary competitive factors for home furnishings in our price points include price, style, availability, service, quality and durability. Competitive factors in the hospitality and contract furniture markets include product value and utility, lead times, on-time delivery and the ability to respond to requests for special and non-standard products. We believe our design capabilities, ability to import and/or manufacture upholstered furniture, product value, longstanding customer and supplier relationships, significant sales, distribution and inventory capabilities, ease of ordering, financial strength, experienced management and customer support are significant competitive advantages.

Warehousing and Distribution

We distribute furniture to retailers directly from factories and warehouses in Asia via our container direct programs and from our distribution centers in Virginia, North Carolina and California, and in limited cases, from customer operated warehouses in strategic locations. It is our policy and industry practice to allow order cancellation for casegoods up to the time of shipment or, in the case of container direct orders, up until the time the container is booked with the ocean freight carrier, therefore, customer orders for casegoods are not firm. However, domestically produced upholstered products are predominantly custom-built and consequently, cannot be cancelled once the leather or fabric has been cut. Additionally, our hospitality products are highly customized and are generally not cancellable.

Working Capital Practices

Inventory: We generally import casegoods inventory and certain upholstery items in amounts that enable us to meet the delivery requirements of our customers, our internal in-stock goals and minimumpurchase requirements from our sourcing partners. However, during fiscal 2019 and 2020 we accelerated the delivery and subsequently increased inventory levels of some imported products from China due to the threat of tariffs on those products and the threat of subsequent increased tariffs. However, a large percentage of products sold are not warehoused by us but ship directly to our customers and thus not included as inventory. We do not carry significant amounts of domestically produced upholstery inventory or hospitality products, as most of these products are built to order and are shipped shortly after their manufacture.

Accounts receivable: Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, which consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. For qualified customers, we offer payment terms, generally requiring payment 30 days from shipment. However, we may offer extended payment terms in certain circumstances, including to promote sales of our product. Due to the COVID-19 crisis in the U.S. and the related decline in demand for home furnishings that began in the first quarter of fiscal 2021, some customers have informed us that they intend to take extended credit terms of 60-120 days. We purchase accounts receivable insurance on certain customers or factor their receivables if their risk profile warrants it and the insurance is available. Due to the highly-customized nature of our hospitality products, we typically require a 50% deposit with order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer.

Accounts payable: Payment for our imported products warehoused first in Asia is due ten to fourteen days after our quality audit inspections are complete and the vendor invoice is presented. Payment for goods which are shipped to our US warehouses or container direct to our customers FOB Origin is generally due upon proof of lading onto a US-bound vessel and invoice presentation; however, payment terms, depending on the supplier, can stretch up to 45 days from invoice date. Payment terms for domestic raw materials and non-inventory related charges vary but are generally 30 days from invoice date.

Order Backlog

At February 2, 2020, our backlog of unshipped orders was as follows:

  

Order Backlog

 
  

(Dollars in 000s)

 
                 
  

February 2, 2020

  

February 3, 2019

 

Reporting Entity

 

Dollars

  

Weeks

  

Dollars

  

Weeks

 
                 

Hooker Branded

 $10,979   3.5  $11,259   3.3 

Home Meridian

  85,556   13.1   79,024   10.8 

Domestic Upholstery

  14,705   8.0   11,700   5.8 

All Other

  2,520   10.5   1,977   10.1 
                 

Consolidated

 $113,760   9.7  $103,960   8.1 

Order backlog increased $9.8 million or 9.4% as compared to the prior-year due to orders in the Home Meridian segment during the 2020 fiscal fourth quarter and due to the timing of orders received in the Domestic Upholstery segment for two major customers near the end of fiscal 2020.

For the Hooker Branded segment, Domestic Upholstery segment and All Other, we consider unshipped order backlogs to be one helpful indicator of sales for the upcoming 30-day period, but because of our relatively quick delivery and our cancellation policies (discussed under Warehousing and Distribution, above), we do not consider order backlogs to be a reliable indicator of expected long-term sales. We consider the Home Meridian segment’s backlog to be one helpful indicator of that segment’s sales for the upcoming 90-day period. Due to (i) Home Meridian’s sales volume, (ii) the average sales order sizes of its mass, club and mega account channels of distribution, (iii) the proprietary nature of many of its products and (iv) the project nature of its hospitality business, that segment’s average order sizes tend to be larger and consequently, its order backlog tends to be larger. However, due to the order and supply disruptions caused by COVID-19, a spike in order cancellations in early fiscal 2021 has decreased the usefulness of order backlog at February 2, 2020 as an indicator of future sales.

Seasonality

Generally, sales in our fiscal first quarter are lower than our other fiscal quarters due to the post-Chinese New Year shipping lag and sales in our fiscal fourth quarter are generally stronger due to the pre-Chinese New Year surge in shipments from Asia and the product introduction schedule of a major customer.

Environmental Matters

As a part of our business operations, our manufacturing sites generate both non-hazardous and hazardous wastes; the treatment, storage, transportation and disposal of which are subject to various local, state and national laws relating to environmental protection. Our policy is to record monitoring commitments and environmental liabilities when expenses are probable and can be reasonably estimated. The costs associated with our environmental responsibilities, compliance with federal, state and local laws regulating the discharge of materials into the environment, or costs otherwise relating to the protection of the environment, have not had and are not expected to have a material effect on our financial position, results of operations, capital expenditures or competitive position.

Employees

As of February 2, 2020, we had 1,251 full-time employees, of which 236 were employed in our Hooker Branded segment, 377 were employed in our Home Meridian segment, 630 were employed in our Domestic Upholstery segment and 8 were employed in All Other. None of our employees are represented by a labor union. We consider our relations with our employees to be good.

Patents and Trademarks

The Hooker Furniture, Bradington-Young, Sam Moore, Pulaski Furniture, Samuel Lawrence Furniture, Samuel Lawrence Hospitality, Room Gear, Right2Home, Home Meridian International, Prime Resources International, Accentrics Home, HMidea, Shenandoah, H Contract, Homeware and MARQ trade names represent many years of continued business.  We believe these trade names are well-recognized and associated with quality and service in the furniture industry.  We also own a number of patents and trademarks, both domestically and internationally, none of which is considered to be material. 

Governmental Regulations

Our company is subject to U.S. federal, state and local laws and regulations in the areas of safety, health, employment and environmental pollution controls, as well as U.S. and international trade laws and regulations. We are also subject to foreign laws and regulations. In the past, compliance with these laws and regulations has not had any material effect on our earnings, capital expenditures, or competitive position in excess of those affecting others in our industry; however, the effect of compliance in the future cannot be predicted. We believe we are in material compliance with applicable U.S. and international laws and regulations.

Additional Information

You may visit us online at hookerfurniture.com, bradington-young.com, sammoore.com, homemeridian.com, pulaskifurniture.com, slh-co.com and hcontractfurniture.com. We make available, free of charge through our Hooker Furniture website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports, and other documents as soon as practical after they are filed with or furnished to the Securities and Exchange Commission. A free copy of our annual report on Form 10-K may also be obtained by contacting Earl Armstrong, Corporate Controller and Secretary at Earmstrong@hookerfurniture.com or by calling 276-632-2133.

ITEM 1A. RISK FACTORS

Our business is subject to a variety of risks. The risk factors discussed below should be considered in conjunction with the other information contained in this annual report on Form 10-K. If any of these risks actually materialize, our business, results of operations, financial condition or future prospects could be negatively impacted. These risks are not the only ones we face. There may be additional risks that are presently unknown to us or that we currently believe to be immaterial that could affect us.

We expect the impact of COVID-19 to adversely affect our sales, earnings, financial condition and liquidity.

The COVID-19 pandemic is a serious threat to health and economic wellbeing affecting our customers, our associates and our suppliers. Federal, state and local authorities have recommended social distancing and have imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business closures for all non-essential businesses in certain jurisdictions. As home furnishings purchases are largely postponable and most of our customer’s businesses are classified as non-essential, traffic to our customers’ stores and demand for our products have decreased and our sales have deteriorated, therefore we expect our earnings and liquidity to be negatively impacted as a result. COVID-19 also impacted and continues to impact our Asian supply chain, particularly as a result of mandatory shutdowns in locations where our products are manufactured, we have experienced out-of-stocks and lost sales as a result. Due to decreased demand and stay-at-home orders issued by the state government, our domestic manufacturing and warehouse associates are working fewer hours and most of our administrative associates are tele-commuting. However, we may be forced to close locations for reasons such as the health of our associates, because of disruptions in the continued operation of our domestic or Asian supply chain or due to further federal, state or local orders impacting our operations.

The extent of the impact of COVID-19 on our business and financial results will also depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on consumer confidence and spending, all of which are highly uncertain and ever-changing. The sweeping nature of the COVID-19 pandemic makes it extremely difficult to predict how our business and operations will be affected in the longer run. However, the likely overall economic impact of the pandemic is viewed as highly negative to the general economy. Any of the foregoing factors, or other cascading effects of the coronavirus pandemic, could materially increase our costs, negatively impact our sales and damage the company’s results of operations and its liquidity, possibly to a significant degree. The duration of any such impacts cannot be predicted.

We rely on offshore sourcingfrom Vietnam and China for most of our sales. Consequently:

Recently enacted tariffs and potential future increases in tariffs on manufactured goods imported from China could adversely affect our business.

Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on certain goods imported into the United States from China, including all furniture and furniture components manufactured in China, which increased to 25% in May 2019. Inability to reduce product costs, pass through price increases or find other suitable manufacturing sources outside of China may have a material adverse impact on sales volume, earnings and liquidity. In addition, the tariffs, and our responses to the tariffs, may cause our products to become less competitive due to price increases or less profitable due to lower margins. Our inability to effectively manage the negative impacts of changing U.S. and foreign trade policies could adversely affect our business and financial results.

We are subject to changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products.

Changes in political, economic and social conditions, as well as in the laws and regulations in the foreign countries from which we source our products could adversely affect our sales, earnings, financial condition and liquidity. These changes could make it more difficult to provide products and service to our customers or could increase the cost of those products. International trade regulations and policies of the United States and the countries from which we source finished products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports affecting our products could increase our costs and decrease our earnings. For example, the U.S. Department of Commerce imposes tariffs on wooden bedroom furniture coming into the United States from China. In this case, none of the rates imposed have been of sufficient magnitude to alter our import strategy in any meaningful way; however, these and other tariffs are subject to review and could be increased or new tariffs implemented in the future.

A disruption in supply from Vietnam or China or from our most significant Vietnamese or Chinese suppliers could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.

In fiscal 2020, imported products sourced from Vietnam and China accounted for nearly all of our import purchases and our top five suppliers in Vietnam and China account for approximately half of our fiscal 2020 import purchases. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. Our supply chain could be adversely impacted by the uncertainties of health concerns and governmental restrictions. In early 2020, the COVID-19 outbreak in China resulted in the temporary shutdown or reduced capacity of our vendors’ factories and significantly slowed the post-Chinese New Year production recovery. Consequently, we experienced some out-of-stocks, but we in some cases were able to provide substitutions out of inventory on hand, in-transit and from our domestic warehouses, but not enough to entirely mitigate the lost sales. Many of our vendors’ factories are back online and others have closed temporarily because of low demand due to the effects of COVID-19 in the U.S. and elsewhere. Consequently, we expect shortages of certain products. If such disruptions were to occur again, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Virginia, North Carolina and California to adequately meet demand for several months or slightly longer with an additional month’s worth of demand available for immediate shipment from our warehouses in Asia. We believe we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for six months or longer before the impact of remedial measures would be reflected in our results. Additionally, we have limited insight into how our supply chain could be further impacted by COVID-19 and there are many unknowns including how long we will be impacted, the severity of the impacts and the probability of a recurrence of COVID-19 or similar regional or global pandemics. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity.

Increased freight costs on imported products could decrease earnings and liquidity.

Ocean freight costs on imported products currently represent a significant portion of the cost of our imported products. Ocean freight rates on our imported products are affected by a myriad of factors including the global economy, petroleum prices and ocean freight carrier capacity. Increased ocean freight rates in the future would likely adversely affect earnings, financial condition and liquidity.

Our dependence on suppliers could, over time, adversely affect our ability to service customers.

We rely heavily on suppliers we do not own or control, including a large number of non-US suppliers. All of our suppliers may not provide goods that meet our quality, design or other specifications in a timely manner and at a competitive price. If our suppliers do not meet our specifications, we may need to find alternative suppliers, potentially at a higher cost, or may be forced to discontinue products. Also, delivery of goods from non-U.S. suppliers may be delayed for reasons not typically encountered for domestically manufactured furniture, such as shipment delays caused by customs issues, labor issues, port-related issues such as weather, congestion or port equipment, decreased availability of shipping containers and/or the inability to secure space aboard shipping vessels to transport our products. Our failure to timely fill customer orders due to an extended business interruption for a major supplier, or due to transportation issues, could negatively impact existing customer relationships and adversely affect our sales, earnings, financial condition and liquidity.

Our inability to accurately forecast demand for our imported products could cause us to purchase too much, too little or the wrong mix of inventory.

Manufacturing and delivery lead times for our imported products necessitate that we make forecasts and assumptions regarding current and future demand for these products. If our forecasts and assumptions are inaccurate, we may purchase excess or insufficient amounts of inventory. If we purchase too much or the wrong mix of inventory, we may be forced to sell it at lower margins, which could adversely affect our sales, earnings, financial condition and liquidity. If we purchase too little or the wrong mix of inventory, we may not be able to fill customer orders and may lose market share and weaken or damage customer relationships, which also could adversely affect our sales, earnings, financial condition and liquidity.

Changes in the value of the U.S. Dollar compared to the currencies for the Company with a broad performance indicator, the Russell 2000® Index, countries from which we obtain our imported products could adversely affect our sales, earnings, financial condition and an industry index, the Household Furniture Index, for the period from February 2, 2014 to February 3, 2019.liquidity.

For imported products, we generally negotiate firm pricing with our foreign suppliers in U.S. Dollars, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we must pay for imported products beyond the negotiated periods. These price changes could decrease our sales, earnings, financial condition and liquidity during affected periods.

 

Supplier transitions, including cost or quality issues, could result in longer lead times and shipping delays.

In the past, inflation concerns, and to a lesser extent quality and supplier viability concerns, affecting some of our imported product suppliers located in China prompted us to source more of our products from lower cost suppliers located in other countries, such as Vietnam. As discussed above, during fiscal 2020 we transitioned a significant portion of our imported product purchases from China to Vietnam due to the imposition of tariffs on most furniture and component parts imported from China. As conditions dictate, we could be forced to make similar transitions in the future. When undertaken, transitions of this type involve significant planning and coordination by and between us and our new suppliers in these countries. Despite our best efforts and those of our new sourcing partners, these transition efforts are likely to result in longer lead times and shipping delays over the short term. Risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products. One or a combination of these issues could adversely affect our sales, earnings, financial condition and liquidity.

A disruption affecting our domestic facilities could disrupt our business.

The warehouses in which we store our inventory in Virginia, North Carolina and California are critical to our success. Our corporate and divisional headquarters, which house our administration, sourcing, sales, finance, merchandising, customer service and logistics functions for our imported and domestic products are located in Virginia and North Carolina. Our domestic upholstery manufacturing facilities are located in Virginia and North Carolina. Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subject to the risk of losses arising from explosions and fires. Additionally, our domestic operations have been negatively affected recently by COVID-19. We enacted business continuity plans and most administrative employees are telecommuting given recommendations for social distancing and stay-at-home orders from state and local governments. We instituted increased cleaning regimens and have instituted social distancing for manufacturing and warehousing associates. Additionally, due to the adverse effect on our sales, some domestic associates have been furloughed or laid off. Any disruption affecting our domestic facilities, for even a relatively short period of time, could adversely affect our ability to ship our furniture products and disrupt our business, which could adversely affect our sales, earnings, financial condition and liquidity.

Fluctuations in the price, availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase our costs.

We use various types of wood, leather, fabric, foam and other filling material, high carbon spring steel, bar and wire stock and other raw materials in manufacturing upholstered furniture. We depend on outside suppliers for raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at acceptable prices and in a timely manner. We do not have long-term supply contracts with our suppliers. Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers. We may not always be able to pass price increases in raw materials through to our customers due to competition and other market pressures. The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings, financial condition and liquidity.

If demand for our domestically manufactured upholstered furniture declines, we may respond by realigning manufacturing.

Our domestic manufacturing operations make only upholstered furniture. A decline in demand for our domestically produced upholstered furniture could result in the realignment of our domestic manufacturing operations and capabilities and the implementation of cost-saving measures. These programs could include the consolidation and integration of facilities, functions, systems and procedures. We may decide to source certain products from other suppliers instead of continuing to manufacture them. These realignments and cost-saving measures typically involve initial upfront costs and could result in decreases in our near-term earnings before the expected cost savings are realized, if they are realized at all. We may not always accomplish these actions as quickly as anticipated and may not achieve the expected cost savings, which could adversely affect our sales, earnings, financial condition and liquidity.

The interruption, inadequacy or security failure of our information systems or information technology infrastructure or the internet or inadequate levels of cyber-insurance could adversely impact our business,sales, earnings, financial condition and liquidity.

Our information systems (software) and information technology (hardware) infrastructure platforms and those of third parties who provide these services to us, including internet service providers and third-parties who store data for us on their servers (“the cloud”), facilitate and support every facet of our business, including the sourcing of raw materials and finished goods, planning, manufacturing, warehousing, customer service, shipping, accounting, payroll and human resources. Our systems, and those of third parties who provide services to us, are vulnerable to disruption or damage caused by a variety of factors including, but not limited to: power disruptions or outages; natural disasters or other so-called “Acts of God”; computer system or network failures; viruses or malware; physical or electronic break-ins; the theft of computers, tablets and smart phones utilized by our employees or contractors; unauthorized access, phishing and cyber-attacks. The risk of cyberattacks also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a cybersecurity program designed to protect and preserve the integrity of our information systems. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition. Additionally, while we carry cyber insurance, including insurance for social engineering fraud, the amounts of insurance we carry may be inadequate due either to inadequate limits available from the insurance markets or inadequate coverage purchased. Because cyber threat scenarios are inherently difficult to predict and can take many forms, cyber insurance may not cover certain risks. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our information systems or to manage the information systems of third parties to accommodate these changes. If these information systems or technologies are interrupted or fail, or we are unable to adapt our systems or those of third parties as a result of legislative or regulatory actions, our operations and reputation may be adversely affected, we may be subject to legal proceedings, including regulatory investigations and actions, which could diminish investor and customer confidence which could adversely affect our sales, earnings, financial condition and liquidity.

A material part of our sales and accounts receivable are concentrated in a few customers. The loss of several large customers through business consolidations, failures or other reasons, including the adverse economic effects of the COVID-19 pandemic or similar events, could adversely affect our business.

One customer accounted for approximately 11% of our consolidated sales in fiscal 2020, our top five customers accounted for about 30% of our fiscal 2020 consolidated sales. 35% of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity. The loss of any one or more of these customers could adversely affect our sales, earnings, financial condition and liquidity. The loss of several of our major customers through business consolidations, failures or otherwise, could adversely affect our sales, earnings, financial condition and liquidity and the resulting loss in sales may be difficult or impossible to replace. Should the negative economic effects of COVID-19 persist or another similar event or events occur, the negative developments described in this paragraph would be more likely to occur. Amounts owed to us by a customer whose business fails, or is failing, may become uncollectible, and we could lose future sales, any of which could adversely affect our sales, earnings, financial condition and liquidity.

We may not be able to collect amounts owed to us.

We grant payment terms to most customers ranging from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. As a result of the COVID-19 pandemic, during the fiscal 2021 first quarter some customers have requested extended payment terms or informed us they will not pay amounts within agreed upon terms. We also purchase credit insurance on certain customers’ receivables and factor certain other customer accounts. Some of our customers have experienced, and may in the future experience, credit-related issues. Were the negative economic effects of COVID-19 to persist or a similar pandemic or another major, unexpected event with negative economic effects occur, we may not be able to collect amounts owed to us or such payment may only occur after significant delay. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment, especially in the current environment. We may be unable to obtain sufficient credit insurance on certain customers’ receivable balances. Should more customers than we anticipate experience liquidity issues, if payment is not received on a timely basis, or if a customer declares bankruptcy or closes stores, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity.

Unauthorized disclosure of confidential information provided to us by our customers, employees, or third parties could harm our business.

We rely on the internet and other electronic methods to transmit confidential information and we store confidential information on our networks. If there was a disclosure of confidential information by our employees or contractors, including accidental loss, inadvertent disclosure or unapproved dissemination of information, or if a third party were to gain access to the confidential information we possess, our reputation could be harmed, and we could be subject to civil or criminal liability and regulatory actions. A claim that is brought against us, successful or unsuccessful, that is uninsured or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings, financial condition and liquidity.

Our sales and operating results could be adversely affected by product safety concerns.

If our product offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to regulatory enforcement action and/or private litigation. While we carry general and umbrella liability insurance for such events, settlements or jury awards could exceed our policy limits. Reputational damage caused by real or perceived product safety concerns or failure to prevail in private litigation against us could adversely affect our business, sales, earnings, financial condition and liquidity.

We incurred significant debt to provide permanent financing for recent acquisitions.

We currently owe $30.1 million on term loans for recent acquisitions. Principal and interest payments on the borrowed funds were $6.4 million in fiscal 2020. We are subject to interest rate volatility due to the variable interest rates on these term loans. Among other risks, our debt:

may limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt;

will require a portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of cash flows to fund working capital, capital expenditures, dividend payments and other general corporate purposes;

may result in higher interest expense in the event of increases in market interest rates for both long‑term debt as well as any borrowings under our line of credit at variable rates; and

may require that additional terms, conditions or covenants be placed on us.

Additionally, all balances under these term loans are due and payable on February 1, 2021, the first day of fiscal 2022. We intend to refinance these loans during fiscal 2021. If we are unsuccessful in refinancing these loans, it would have a material adverse impact on our liquidity. If the negative economic effects of COVID-19 persist, it would likely have a material adverse effect on our sales, earnings and liquidity. Consequently, our credit rating may decrease and refinancing our debt may be more difficult and any new loans more costly.

We may engage in acquisitions and investments in companies, form strategic alliances and pursue new business lines. These activities could disrupt our business, dilute our earnings per share, decrease the value of our common stock and decrease our earnings and liquidity.

We may acquire or invest in businesses such as those that offer complementary products and that we believe offer competitive advantages. However, we may fail to identify significant liabilities or risks that could negatively affect us or result in our paying more for the acquired company or assets than they are worth. We may also have difficulty assimilating and integrating the operations and personnel of an acquired business into our current operations. Acquisitions may disrupt or distract management from our ongoing business. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share and decrease the value of our common stock. We may pursue new business lines in which we have limited or no prior experience or expertise. These pursuits may require substantial investment of capital and personnel. New business initiatives may fail outright or fail to produce an adequate return, which could adversely affect our earnings, financial condition and liquidity.

We may experience impairment of our long-lived assets, which would decrease our earnings and net worth.

At February 2, 2020, we had $103.3 million in net long-lived assets, consisting primarily of property, plant and equipment, trademarks, trade names and goodwill. Our goodwill, some trademarks and tradenames have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Our definite-lived assets consist of property, plant and equipment and certain intangible assets related to our recent acquisitions and are tested for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. The outcome of impairment testing could result in the write-down of all or a portion of the value of these assets. A write-down of our assets would, in turn, reduce our earnings and net worth. See Notes 9 and 10 for additional information.

We may not be able to maintain or raise prices in response to inflation and increasing costs.

Competitive and market forces could prohibit future successful price increases for our products in order to offset increased costs of finished goods, raw materials, freight and other product-related costs, which could adversely affect our sales, earnings, financial condition and liquidity.

Economic downturns could result in decreased sales, earnings and liquidity.

The furniture industry is particularly sensitive to cyclical variations in the general economy and to uncertainty regarding future economic prospects, including the current and evolving negative economic effects of the COVID-19 pandemic. Home furnishings are generally considered a postponable purchase by most consumers. Economic downturns could affect consumer spending habits by decreasing the overall demand for home furnishings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, the availability of consumer credit and broader national or geopolitical factors have particularly significant effects on our business. We have seen negative effects on all of these measures due to the COVID-19 pandemic. A recovery in our sales could lag significantly behind a general recovery in the economy after an economic downturn, due to, among other things, the postponable nature and relatively significant cost of home furnishings purchases. These events could also impact retailers, our primary customers, possibly adversely affecting our sales, earnings, financial condition and liquidity.

We may lose market share due to furniture retailers by-passing us and sourcing directly from non-U.S. furniture sources.

Some large furniture retailers are sourcing directly from non-U.S. furniture factories. Over time, this practice may expand to smaller retailers. As a result, we are continually subject to the risk of losing market share, which could adversely affect our sales, earnings, financial condition and liquidity.

Failure to anticipate or timely respond to changes in fashion and consumer tastes could adversely impact our business.

Furniture is a styled product and is subject to rapidly changing fashion trends and consumer tastes, as well as to increasingly shorter product life cycles. If we fail to anticipate or promptly respond to these changes we may lose market share or be faced with the decision of whether to sell excess inventory at reduced prices. This could adversely affect our sales, earnings, financial condition and liquidity.

We may incur higher employee costs in the future.

We maintain self-insured healthcare and workers compensation plans for our employees. We have insurance coverage in place for aggregate claims above specified amounts in any year for both plans. Our healthcare costs in recent years have generally increased at the same rate or greater than the national average, and healthcare costs have increased more rapidly than general inflation in the U.S. economy. Continued inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Our workers compensation claims costs have had only a modest impact on our overall results of operations for quite some time; however, these costs may increase in the future without warning. Continued increases in our healthcare costs and increased workers compensation claims costs could adversely affect our earnings, financial condition and liquidity.

Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year.

Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect to demand for our home furnishing products. Accordingly, our results of operations for any quarter are not necessarily indicative of the results of operations to be expected for a full year.

Future costs of complying with various laws and regulations may adversely impact future operating results.

Our business is subject to various domestic and international laws and regulations that could have a significant impact on our operations and the cost to comply with such laws and regulations could adversely impact our sales, earnings, financial condition and liquidity. In addition, failure to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact our operations and reputation.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

Set forth below is information with respect to our principal properties at April 17, 2020. We believe all of these properties are well-maintained and in good condition. During fiscal 2020, we estimate our upholstery plants operated at approximately 78% of capacity on a one-shift basis. All our production facilities are equipped with automatic sprinkler systems. All facilities maintain modern fire and spark detection systems, which we believe are adequate. We have leased certain warehouse facilities for our distribution and import operations, typically on a short or medium-term basis. We expect that we will be able to renew or extend these leases or find alternative facilities to meet our warehousing and distribution needs at a reasonable cost. All facilities set forth below are active and operational, representing approximately 4.0 million square feet of owned space, leased space or properties utilized under third-party operating agreements.

Location

Segment Use

Primary Use

Approximate Size

in Square Feet

Owned or Leased

Martinsville, Va.

All segments

Corporate Headquarters, Distribution, Manufacturing and Warehousing

1,489,766

Owned / Leased

High Point, N.C.

All segments

Office, Showroom and Warehouse

225,292

Leased

Madison / Mayodan, NC

HM

Warehouse

935,144

Leased

Redlands, CA.

HM

Warehouse

327,790

Leased

Bedford, Va.

DU

Manufacturing and Offices

327,000

Owned

Hickory, N.C.

DU

Manufacturing and Offices

166,000

Leased

Mt. Airy, N.C.

DU

Manufacturing and warehousing

104,150

Leased

Valdese, N.C.

DU

Manufacturing and warehousing

102,905

Leased

Cherryville, N.C.

DU

Manufacturing Supply Plant

53,000

Owned

Dongguan, China

HB, HM

Office, Warehouse and Distribution

213,426

Leased

Haining, China

HM

Office

1,690

Leased

Ho Chi Minh City, VN

HB, HM

Office, Warehouse and Distribution

57,893

Leased

Thu Dau Mot, VN

HB

Office

1,722

Leased

HB=Hooker Branded, HM=Home Meridian, DU=Domestic Upholstery

ITEM 3.     LEGAL PROCEEDINGS

None.

ITEM 4.     MINE SAFETY DISCLOSURES

None.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

Hooker Furniture’s executive officers and their ages as of April 17, 2020 and the calendar year each joined the Company are as follows:

Name

 

Age

 

Position

 

Year Joined Company

Paul B. Toms, Jr.

 

65

 

Chairman and Chief Executive Officer

 

1983

Paul A. Huckfeldt

 

62

 

Chief Financial Officer and

 

2004

    

   Senior Vice President - Finance and Accounting

  

Anne Jacobsen Smith

 

58

 

Chief Administration Officer

 

2008

D. Lee Boone

 

57

 

Co-President - Home Meridian Segment

 

2016

Jeremy R. Hoff

 

46

 

President - Hooker Legacy Brands

 

2017

Douglas Townsend

 

53

 

Co-President - Home Meridian Segment

 

2016

Paul B. Toms, Jr. has been Chairman and Chief Executive Officer since December 2000 and also served as President for most of the period from November 2006 to August 2011. Mr. Toms was President and Chief Operating Officer from December 1999 to December 2000, Executive Vice President - Marketing from 1994 to December 1999, Senior Vice President - Sales and Marketing from 1993 to 1994, and Vice President - Sales from 1987 to 1993. Mr. Toms joined the Company in 1983 and has been a Director since 1993.

Paul A. Huckfeldt has been Senior Vice President - Finance and Accounting since September 2013 and Chief Financial Officer since January 2011. Mr. Huckfeldt served as Vice President – Finance and Accounting from December 2010 to September 2013, Corporate Controller and Chief Accounting Officer from January 2010 to January 2011, Manager of Operations Accounting from March 2006 to December 2009 and led the Company’s Sarbanes-Oxley implementation and subsequent compliance efforts from April 2004 to March 2006.

Anne Jacobsen Smithhas been Chief Administration Officer since July 2018. Ms. Smith served as Senior Vice President – Administration from January 2014 to June 2018, Vice President- HR and Administration from January 2011 to January 2014 and Vice President-Human Resources from November 2008 to January 2011. Ms. Smith joined the Company in January of 2008 as Director of Human Resources.

D. Lee Boonehas been Co-President of the Home Meridian Segment since June 2018. Mr. Boone joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016 as President of Samuel Lawrence Furniture, a division of Home Meridian International. Prior to that, Mr. Boone served as President of Legacy Classic Furniture from 2006 to 2012.

Jeremy R. Hoffhas been President of Hooker Legacy Brands since February 2020. Mr. Hoff served as President of the Hooker Branded Segment from April 2018 to January 2020. Mr. Hoff joined the Company in August of 2017 as President of Hooker Upholstery. Prior to that, Mr. Hoff served as President of Theodore Alexander USA from December 2015 to August 2017 and Senior Vice President of sales at A.R.T. Furniture Inc. from April 2015 to November 2015 and Vice-President of Sales from March 2011 to April 2015.

Douglas Townsendhas been Co-President of the Home Meridian Segment since June 2018. Mr. Townsend joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016 as Senior Vice President of U.S. Operations and Chief Operating Officer of both Samuel Lawrence Hospitality and the Clubs Division.  Prior to the acquisition, he was Executive Vice President of Home Meridian International from October 2011 to February 2016.

Hooker Furniture Corporation

Part II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     

Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. As of February 2, 2020, we had approximately 7,000 beneficial shareholders. We currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

During the fiscal 2013 first quarter, our Board of Directors authorized the repurchase of up to $12.5 million of the Company’s common shares. No shares have been repurchased since fiscal 2013. Approximately $11.8 million remained available under the board’s authorization as of February 2, 2020. In April 2020 (fiscal 2021), our Board of Directors terminated this repurchase authorization after several years of inactivity. For additional information regarding this repurchase authorization, see the “Share Repurchase Authorization” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Performance Graph

The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index, and a published industry index, the Household Furniture Index, for the period from February 1, 2015 to February 2, 2020.

 

(1)

The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends.

 

(2)

The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization and includes the Company.

(3)

Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under Standard Industrial Classification (SIC) Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada.  At February 2, 2020, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Nova Lifestyle, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furniture Corporation, Sleep Number Corp., Kimball International, Inc., Luvu Brands, Inc., Tempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., Horrison Resources, Inc., The Rowe Companies, and Dorel Industries.  

 

(3)

Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under SIC Codes 2510 and 2511, which includes home furnishings companies that are publicly traded in the United States or Canada.  At February 3, 2019, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Nova Lifestyle, Inc., La-Z-Boy, Inc., Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furniture Corporation, Sleep Number Corp., Kimball International, Inc., Luvu Brands, Inc., Tempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., HG Holdings, Inc., Horrison Resources, Inc., The Rowe Companies, and Dorel Industries.  

ITEM 6.     SELECTED FINANCIAL DATA

 

The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations.

  

Fiscal Year Ended (1)

 
  

February 2,

  

February 3,

  

January 28,

  

January 29,

  

January 31,

 
  

2020

  

2019

  

2018

  

2017

  

2016

 
  (In thousands, except per share data) 

Income Statement Data:

                    

Net sales

 $610,824  $683,501  $620,632  $577,219  $246,999 

Cost of sales

  496,866   536,014   485,815   451,098   178,311 

Casualty loss (2)

  -   500   -   -   - 

Gross profit

  113,958   146,987   134,817   126,121   68,688 

Selling and administrative expenses (3)

  88,867   91,928   87,279   83,186   43,959 

Intangible asset amortization (4)

  2,384   2,384   2,084   3,134   - 

Operating income (3)

  22,707   52,675   45,454   39,801   24,729 

Other income (expense), net (3)

  458   369   1,566   349   (206)

Interest Expense, net

  1,238   1,454   1,248   954   64 

Income before income taxes

  21,927   51,590   45,772   39,196   24,459 

Income taxes

  4,844   11,717   17,522   13,909   8,274 

Net income

  17,083   39,873   28,250   25,287   16,185 
                     

Per Share Data:

                    

Basic earnings per share

 $1.44  $3.38  $2.42  $2.19  $1.50 

Diluted earnings per share

 $1.44  $3.38  $2.42  $2.18  $1.49 

Cash dividends per share

  0.61   0.57   0.50   0.42   0.40 

Net book value per share (5)

  23.25   22.37   19.53   17.16   14.46 

Weighted average shares outstanding (basic) (6)

  11,784   11,759   11,633   11,531   10,779 
                     

Balance Sheet Data:

                    

Cash and cash equivalents

 $36,031  $11,435  $30,915  $39,792  $53,922 

Trade accounts receivable

  87,653   112,557   92,803   92,578   28,176 

Inventories

  92,813   105,204   84,459   75,303   43,713 

Working capital

  171,838   170,516   153,162   147,856   111,462 

Total assets

  393,708   369,716   350,058   318,696   181,653 

Long-term debt (including current maturities) (7)

  30,138   35,508   53,425   47,710   - 

Shareholders' equity

  274,121   263,176   229,460   197,927   156,061 

(1)

Our fiscal years has been derived from our audited, consolidated financial statements.end on the Sunday closest to January 31. The selected financial data should be read in conjunction withfiscal years presented above all had 52 weeks, except for the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations.

 

 

Fiscal Year Ended (1)

 

 

 

February 3,

 

 

January 28,

 

 

January 29,

 

 

January 31,

 

 

February 1,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

 

 

 

 

(In thousands, except per share data)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

683,501

 

 

$

620,632

 

 

$

577,219

 

 

$

246,999

 

 

$

244,350

 

Cost of sales

 

 

536,014

 

 

 

485,815

 

 

 

451,098

 

 

 

178,311

 

 

 

181,550

 

Casualty loss (2)

 

 

500

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Gross profit

 

 

146,987

 

 

 

134,817

 

 

 

126,121

 

 

 

68,688

 

 

 

62,800

 

Selling and administrative expenses (3)

 

 

91,928

 

 

 

87,279

 

 

 

83,186

 

 

 

43,959

 

 

 

43,464

 

Intangible asset amortization (4)

 

 

2,384

 

 

 

2,084

 

 

 

3,134

 

 

 

-

 

 

 

-

 

Operating income (3)

 

 

52,675

 

 

 

45,454

 

 

 

39,801

 

 

 

24,729

 

 

 

19,336

 

Other income (expense), net (3)

 

 

369

 

 

 

1,566

 

 

 

349

 

 

 

(206

)

 

 

115

 

Interest Expense, net

 

 

1,454

 

 

 

1,248

 

 

 

954

 

 

 

64

 

 

 

53

 

Income before income taxes

 

 

51,590

 

 

 

45,772

 

 

 

39,196

 

 

 

24,459

 

 

 

19,398

 

Income taxes

 

 

11,717

 

 

 

17,522

 

 

 

13,909

 

 

 

8,274

 

 

 

6,820

 

Net income

 

 

39,873

 

 

 

28,250

 

 

 

25,287

 

 

 

16,185

 

 

 

12,578

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

3.38

 

 

$

2.42

 

 

$

2.19

 

 

$

1.50

 

 

$

1.17

 

Diluted earnings per share

 

$

3.38

 

 

$

2.42

 

 

$

2.18

 

 

$

1.49

 

 

$

1.16

 

Cash dividends per share

 

 

0.57

 

 

 

0.50

 

 

 

0.42

 

 

 

0.40

 

 

 

0.40

 

Net book value per share (5)

 

 

22.37

 

 

 

19.53

 

 

 

17.16

 

 

 

14.46

 

 

 

13.30

 

Weighted average shares outstanding (basic) (6)

 

 

11,759

 

 

 

11,633

 

 

 

11,531

 

 

 

10,779

 

 

 

10,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

11,435

 

 

$

30,915

 

 

$

39,792

 

 

$

53,922

 

 

$

38,663

 

Trade accounts receivable

 

 

112,557

 

 

 

92,803

 

 

 

92,578

 

 

 

28,176

 

 

 

32,245

 

Inventories

 

 

105,204

 

 

 

84,459

 

 

 

75,303

 

 

 

43,713

 

 

 

44,973

 

Working capital

 

 

170,516

 

 

 

153,162

 

 

 

147,856

 

 

 

111,462

 

 

 

100,871

 

Total assets

 

 

369,716

 

 

 

350,058

 

 

 

318,696

 

 

 

181,653

 

 

 

170,755

 

Long-term debt (including current maturities) (7)

 

 

35,508

 

 

 

53,425

 

 

 

47,710

 

 

 

-

 

 

 

-

 

Shareholders' equity

 

 

263,176

 

 

 

229,460

 

 

 

197,927

 

 

 

156,061

 

 

 

142,909

 

(1)

Our fiscal years end on the Sunday closest to January 31. The fiscal years presented above all had 52 weeks, except for the currentprior fiscal year ended February 3, 2019, which had 53 weeks.

 

 

(2)

Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019.

 

(3)

Amounts for fiscal 2018, 2017 and 2016 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic PensionCost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000), $581,000 and $467,000 for fiscal 2018, 2017 and 2016, and 2015 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000), $581,000, $467,000 and $288,000 for fiscal 2018, 2017, 2016 and 2015, respectively.

 

20

Table

(4)

Represents amortization expense on acquisition-related intangibles. The Home Meridian acquisition occurred on February 1, 2016 and the Shenandoah acquisition occurred on September 29, 2017.See note 10 for additional information on our intangible assets.

(5)

Net book value per share is derived by dividing “shareholders’ equity” by the number of Contents

common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period.

 

(4)

We recorded amortization expense of $2.4 million ($1.8 million, or $0.16 per share after tax) in fiscal 2019 on amortizable intangible assets recorded

(6)

Weighted average outstanding shares outstanding changed materially as a result of issuing 716,910 shares of common stock to the designees of HMI as partial consideration for the Home Meridian acquisition and 176,018 shares of common stock to the shareholders of SFI as partial consideration for the Shenandoah acquisition.

(7)

Long-term debt (including current maturities) consists of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions.

  

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As you read Management’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with:

 

(5)

All of our recent public filings made with the Securities and Exchange Commission (“SEC”) which are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com;

Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period.

The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K;

The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and

Our commitments and contractual obligations and off-balance sheet arrangements described on page 35-36 and in Note 19 on page F-39 of this report. These sections describe commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements.

 

In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2020 compared to fiscal 2019 and for fiscal 2019 compared to fiscal 2018. We also provide information regarding the performance of each of our operating segments and All Other.

Unless otherwise indicated, references to the “Company”, "we," "our" or "us" refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Legacy Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment, the Domestic Upholstery segment including Bradington-Young, Sam Moore and Shenandoah Furniture, and All Other which includes H Contract and Lifestyle Brands.

References to the “Shenandoah acquisition” refer to our acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017.

Furniture sales account for all of our net sales. For financial reporting purposes, we are organized into three reportable segments- Hooker Branded, Home Meridian and Domestic Upholstery, with our other businesses included in All Other. We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2020, we updated our reportable segments as follows: Domestic upholstery producers Bradington-Young, Sam Moore and Shenandoah Furniture were moved from All Other and aggregated into a new reportable segment called “Domestic Upholstery.” All Other now consists of H Contract and Lifestyle Brands. Lifestyle Brands is a business in its start-up phase targeted at the interior designer channel. The Hooker Branded and Home Meridian segments were unchanged. Fiscal 2020, 2019 and 2018 results discussed below have been recast based on the re-composition of our operating segments during the 2020 fourth quarter. See Note 18 to our consolidated financial statements for additional financial information regarding our segments.

Overview

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2018 shipments to U.S. retailers, according to a 2019 survey by a leading trade publication.

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins.

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

Executive Summary- Fiscal 2020Results of Operations

Consolidated net sales for fiscal 2020 decreased by 10.6% or $72.7 million as compared to fiscal 2019, from $683.5 million to $610.8 million due primarily to $47.2 million or 12.2% sales decreases in the Home Meridian segment, and to a lesser extent in the Hooker Branded segment and Domestic Upholstery of $16.7 million and $10.9 million decreases respectively, partially offset by $2.1 million net sales increase in All Other. Sales volume loss in all three segments as well as one week less of sales compared to fiscal 2019 led to the net sales decreases. The shorter fiscal year accounted for approximately 18% of the 10% net sales decline.

Consolidated net income for fiscal 2020 decreased by $22.8 million or 57.2% as compared to the prior year, due to lower earnings on sales decline.

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2020 operations:

 

(6)

Gross profit. Consolidated gross profit decreased in absolute terms and as a percentage of net sales due primarily to decreased gross profit in the Home Meridian segment and to a lesser extent in the Hooker Branded segment as the result of lower net sales and higher product costs in both segments as well as increased customer chargebacks and inventory storage and handling costs in our Home Meridian segment. Domestic Upholstery segment gross profit decreased in absolute terms but increased as a percentage of net sales. Consolidated gross profit decrease was partially offset by increased gross profit in All Other and the absence of $500,000 casualty loss related to the damage caused by torrential rains at one of our warehouse facilities recorded in the fiscal 2019.

Weighted average outstanding shares outstanding changed materially as a result of issuing 716,910 shares of common stock to the designees of HMI as partial consideration for the Home Meridian acquisition and 176,018 shares of common stock to the shareholders of SFI as partial consideration for the Shenandoah acquisition.

Selling and administrative expenses. Consolidated selling and administrative (S&A) expenses decreased in absolute terms due to decreased selling expenses and compensation costs resulting from lower net sales and profitability in all three segments, partially offset by increased salaries and wages in the Home Meridian segment incurred during the sourcing transition in Asia and increased selling expenses in All Other on higher net sales. S&A expenses increased as a percentage of net sales due to lower sales.

 

 

(7)

Long-term debt (including current maturities) consists of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions.

Intangible asset amortization expense. Consolidated intangible amortization expense on the Home Meridian and Shenandoah acquisition-related intangible assets was unchanged compared to fiscal 2019.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOperating income.

As you read Management’s Discussion and Analysis, please refer to the selected financial data and theIn fiscal 2020, consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage you to familiarize yourself with:

All of our recent public filings made with the Securities and Exchange Commission (“SEC”) which are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com;

The forward-looking statements disclaimer contained prior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K;

The company-specific risks found in Item 1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and

Our commitments and contractual obligations and off-balance sheet arrangements described on page 34 and in Note 18 on page F-39 of this report. These sections describe commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements.

In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2019 compared to fiscal 2018 and for fiscal 2018 compared to fiscal 2017. We also provide information regarding the performance of each of our operating segments and All Other.

Unless otherwise indicated, references to the “Company”, "we," "our" or "us" refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker”, “Hooker Division”, “Hooker Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment and the domestic upholstery operations contained in All Other: Bradington-Young, Sam Moore, and Shenandoah Furniture.

References to the “Shenandoah acquisition” refer to our acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017. References to the “HMI acquisition” refer to the acquisition of substantially all of the assets of Home Meridian International, Inc. on February 1, 2016.

Overview

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2017 shipments to U.S. retailers, according to a 2018 surveyincome decreased by a leading trade publication.

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional businesses in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our traditional businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs, and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins. This acquisition has provided the Home Meridian segment’s leadership with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

Executive Summary- Fiscal 2019 Results of Operations

The Shenandoah acquisition closed during the third quarter of fiscal 2018. Consequently, All Other’s prior year results only included four-months of Shenandoah’s results beginning on September 29, 2017 through the end of our fiscal 2018 which ended on January 28, 2018.

Consolidated net sales for fiscal 2019 increased 10.1% or $62.9 million to $683.5$30.0 million as compared to fiscal 2018 due2019, from $52.7 million to sales increases in both of our reportable segments and All Other, as well as one additional week of sales in the current fiscal year. Home Meridian net sales increased by $22.4$22.7 million, or 6.1% in fiscal 2019. Hooker Branded segmentfrom 7.7% to 3.7% as a percentage of net sales increased 7.2% or $12.0 million due to strong sales in the imported casegoods and upholstery business. All Other net sales increased by 32.3% or $28.6 million mostly due to the absence of Shenandoah’s results in the first eight months of fiscal 2018, as well as steady sales growth at Bradington Youngfactors discussed above and H Contract.

Consolidated net income for fiscal 2019 increased $11.6 million or over 40% as compared to the prior year, due to higher earnings on increased sales, as well as the tax rate reduction due to the recently enacted Tax Cuts and Job Act of 2017, along with $1.8 million income tax expense to value our deferred tax assets recorded in the fourth quarter of fiscal 2018.

As discussed in greater detail under “Results of Operations” below,in the following are the primary factors that affected our consolidated fiscal 2019 operations:

Gross profit. Consolidated gross profit increased $12.2 million or 9.0% primarily due to sales increases in the Hooker Branded segment and All Other, partially offset by a $500,000 casualty loss recorded in the third quarter, which represented the deductible on our property insurance policy. Gross profit decreased slightly as a percentage of net sales as compared to the prior year period due principally to increased core cost of goods sold and warehousing and distribution expenses in the Home Meridian segment.analysis below.

 

Review

Selling and administrative expenses. Consolidated selling and administrative (S&A) expenses increased in absolute terms due to the addition of Shenandoah’s operations and due to higher compensation, benefits, and selling expenses. These increases were partially offset by a company-owned life insurance gain recognized in the first quarter of fiscal 2019, the absence of Shenandoah acquisition-related costs in the current year and a customer write-off in the prior year. S&A expenses decreased as a percentage of net sales due to higher sales.

 

Fiscal 2020 marked a difficult year in our 95-year history. Sales were soft going into fiscal 2020 (which began on February 4, 2019) due to a stock-market downturn in late 2018 and a 35-day US government shutdown which lasted until January 2019. These soft sales were exacerbated by the fact that many of our customers were already in an over-inventoried position in an effort to get ahead of the threatened increase in tariffs on January 1, 2019. Tariffs on finished goods and component parts imported from China created a chain reaction of higher product costs, higher selling prices to our customers, inventory disruptions and the increased costs and management resources needed to shift production to factories in non-tariff countries. Also in late 2018, we encountered an unexpected quality issue with the Home Meridian segment’s largest customer which had an adverse impact on sales and earnings for much of fiscal 2020.

Intangible asset amortization expense. Consolidated intangible amortization expense increased $300,000 due to the addition of Shenandoah’s acquisition-related intangibles, partially offset by the absence of amortization expense on some shorter-lived Shenandoah acquisition-related intangible assets which were recorded in the fiscal 2018 second-half.

 

Hooker Branded segment net sales decreased by $16.7 million or 9.4% in fiscal 2020, due to a net sales decrease in the Hooker Casegoods division while partially offset by a moderate net sales increase in the Hooker Upholstery division. We increased prices by about 10% on products imported from China to help offset the 25% tariff which was enacted in May 2019 as well as higher freight costs. However, reduced incoming orders and lower sales volume driven by lower consumer demand and softness in home furnishings sales at retail diminished the effect of pricing adjustment and led to a 11% net sales decrease in the Hooker Casegoods division. In an effort to grow sales and support our traditional business as well as our competence in advantaged distribution channels, we continued to bring new introductions and expanded some of our best-selling collections. Given the soft sales in the Hooker Branded segment, we were relatively pleased to maintain Hooker Casegoods profitability close to the same level as compared to prior year. Hooker Upholstery division had a low single-digit net sales increase due to broader and well-received product offerings which led to a 9% increase of incoming orders, as well as favorable product mix with more higher-priced sofas and sectionals sold.

Operating income. In fiscal 2019, consolidated operating income increased $7.2 million or 15.9% and as a percentage of net sales compared to fiscal 2018 due to the factors discussed above and in greater detail in the analysis below.

 

Home Meridian segment net sales decreased by $47.2 million or 12.2% in fiscal 2020. The sales decline with one single major customer represented nearly 80% of the Home Meridian segment’s sales decrease, along with about $4 million in unexpected chargebacks from the same customer. Sales declines with traditional furniture chains represented the remaining sales decrease. Profitability was impacted by the sales decline as well as a write-down of excess inventory, related to the quality issue, to market value (a $1 million charge) and higher demurrage and warehousing costs to store surplus inventory. The segment was more impacted by the imposition of tariffs, with an approximately $7 million negative impact to its gross margin. The majority of Home Meridian’s sales are shipped from our Asian manufacturing partners directly to our retailers rather than stocked in our US warehouses. This fact prevented us from building inventory levels before the 25% tariff became effective. Additionally, due to their size and the price points at which they operate, many of the Home Meridian segment’s customers are more sensitive to price and we were not able to recover enough of the excess tariffs by raising prices.

On a more positive note, Home Meridian’s hospitality and e-commerce sales continued to grow. Samuel Lawrence Hospitality’s (“SLH”) net sales increased over 40% in fiscal 2020. However, excess tariffs and higher freight costs adversely impacted its profitability in this year. Samuel Lawrence Furniture (“SLF”) implemented a mixing warehouse program in Vietnam and offered more options for sourcing products. Its incoming orders increased 9.7% in the fourth quarter of fiscal 2020 and finished the year with backlog 25% higher than prior year end. Prime Resources International (“PRI”) had a difficult year with the majority of Home Meridian’s operating loss coming from this division. Consequently, new division leadership is in the process of rebuilding PRI’s business. Its incoming orders picked up by $3 million in January and it finished the year with backlog 5.5% higher than prior year end. Additionally, Home Meridian has also launched a new division, HMidea, which offers better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers. About $500,000 in start-up costs were incurred for HMidea during the year. These costs were partially offset by a $520,000 gain on the settlement of our pension plan in the third quarter of fiscal 2020, recorded in other income.

Domestic Upholstery segment net sales decreased by $10.9 million or 10.2% due to sales decline in all three domestic upholstery manufacturing divisions driven by decreased unit volume. Bradington-Young and Sam Moore experienced reduced incoming orders throughout fiscal 2020, while Shenandoah’s incoming orders picked up in the fourth quarter and finished the year with backlog nearly 40% higher than prior year end. Our domestic manufacturing divisions benefitted from lower material costs, lower employee benefits expense, and cost reductions implemented by management. However, favorable material costs have leveled out and we do not expect additional decreases in the near future. These positives were partially offset by higher direct labor costs and operating inefficiencies due to lower production volume. Despite decreased net sales, Domestic Upholstery segment reported a solid operating income margin of 6.9% for fiscal 2020, compared to 7.1% in the prior year.

22

Review

We were pleased with our operating results for the year, despite the imposition of tariffs on goods imported from China in the fourth quarter of the year. Net sales increased 10.1% due to both organic growth of about 6% over fiscal 2018 and the addition of a full year of sales at Shenandoah included in All Other. Our diversification strategy also proved its value as we faced challenges in some business units, while others returned to healthy growth after periods of slowness. Net income improved over 40% compared to the prior year. Like many US corporate taxpayers, net income was favorably impacted by the Tax and Jobs Act of 2017, but we are also pleased to report a 15.9% improvement in operating income for the year, with significant increases in both the Hooker Branded segment and in All Other, which includes our domestically-produced upholstery divisions and H Contract furnishings for senior living facilities.

Hooker Branded segment net sales increased $12.0 million or 7.2% in fiscal 2019, with Hooker Casegoods reporting an upper single digit sales increase and Hooker Upholstery reporting a double-digit sales increase. We attribute this growth to reenergized segment leadership and well-received product offerings. Hooker Branded segment orders increased in the single digits for the year and benefitted from increased sales into advantaged distribution channels and what we believe to be exceptional product offerings.

The Home Meridian segment finished fiscal 2019 with a $22.4 million or 6.1% net sales increase, despite a slow start to fiscal 2019 due to vendor interruptions in Asia and decreased sales due to quality challenges with certain products that surfaced in late fiscal 2019. Home Meridian’s 6.1% net sales increase was driven by net sales increases in the hospitality and e-commerce distribution channels, partially offset by weakness in other distribution channels. The majority of the Home Meridian segment’s sales are “container direct” sales which are sales shipped from our Asian manufacturing partners directly to our retailers rather than stocked in our US warehouses. This fact prevented us from building inventory levels before the 10% tariff became effective. Increased product cost resulting from the tariff and unfavorable customer mix negatively impacted the Home Meridian segment’s gross margin.

All Other net sales increased $28.6 million or 32.3% primarily due to the inclusion of Shenandoah’s full year sales, and to a lesser extent due to steady sales growth at Bradington-Young and H Contract. In fiscal 2019, Bradington Young orders and net sales increased by 7.2% and 8.2%, respectively, due to increased sales of higher-priced luxury-motion products. H Contract continued to grow with orders up over 12% for the year and backlog up 73% compared to prior year end as of the end of fiscal 2019. These increases were partially offset by decreased sales at Sam Moore. Sam Moore management implemented cost reductions and better controlled operating expenses, which yielded increased operating margins in fiscal 2019.

Our fiscal 2019 operating results also benefited from $1.0 million gain on company-owned life insurance recognized during the first quarter of fiscal 2019 and the absence of $700,000 Shenandoah-acquisition related costs recorded in prior year period, partially offset by $500,000 casualty loss related to a roof-collapse at one of our Martinsville area warehouses which represented the deductible on our property insurance policy, recorded in the second quarter of fiscal 2019 and increased intangible asset amortization expense due to the addition of Shenandoah acquisition related intangible assets.

Our cash and cash equivalents decreased nearly $20 million to $11.4 million as of February 3, 2019. We strategically increased our inventory levels to support sales growth and in an effort to import product ahead of the imposition of the tariffs during the fourth quarter. We also paid $19.3 million principal and interest including $10 million unscheduled payment to pay off the Shenandoah acquisition related term loans and paid $6.7 million in dividends to our shareholders. In the third quarter of fiscal 2019, our Board of Directors approved the increase of our quarterly dividend to $0.15 per share. With an aggregate $27.7 million available under our Existing Revolver to fund working capital and pending cash receipts from increased trade receivables at year-end, we are confident in our financial condition.

 

All Other reported $2.1 million or 20.7% net sales increase due to strong sales in the H Contract division. H Contract incoming orders increased approximately 15% in fiscal 2020 and finished the year with backlog 28% higher than the prior year end. Growing business in the senior living facilities and contract markets, broader product offerings and favorable product mix with heavier weighting of imported casegoods significantly improved H Contract net sales and profitability.

Despite the imposition of 25% tariffs on goods imported from China and soft retail demand that continued through the year, we were pleased that our Hooker Branded segment, Domestic Upholstery segment and All Other all reported solid operating income to mitigate the $7.2 million operating loss in the Home Meridian segment. Although our overall results were down significantly, some business units showed improvement, or flat performance, which helped mitigate particularly poor performance in other business units.

Our cash and cash equivalents increased approximately $25 million to $36 million as of February 2, 2020 principally due to the collection of accounts receivable and reduced inventory levels for lower than expected sales. Despite disappointing operating results in fiscal 2020, we generated $41.4 million in cash from operating activities and $1.4 million from proceeds received on a note receivable from the sale of a former distribution facility. In addition, in the third quarter of fiscal 2020, our Board of Directors approved the increase of our quarterly dividend to $0.16 per share, an increase of 6.7% or $0.01 per share, for a total of $0.61 per share or about $7.2 million paid in fiscal 2020, an increase of 7.0% or $0.04 per share, compared to the prior year. We also paid $6.4 million in term loan principal and interest and $5.1 million for capital expenditures to expand our manufacturing facilities.

Our total assets and liabilities as of February 2, 2020 each increased approximately $40 million due to the adoption of Topic 842, Leases on the first day of the current fiscal year. With an aggregate $25.7 million available under our Existing Revolver to fund working capital, strategic inventory management and cautious capital expenditures, we are confident in our current financial condition. We believe we have financial resources to weather the expected short-term impacts of COVID-19; however, we have limited insight into the extent to which our business may be impacted by COVID-19, and there are many unknowns including how long and how severely we’ll be impacted. An extended and severe impact may materially and adversely affect our sales, earnings and liquidity.

Results of Operations

 

The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income:

 

 

Fifty-three

 

 

Fifty-two

 

 

Fifty-two

 

 

Fifty-two

  

Fifty-three

  

Fifty-two

 

 

weeks ended

 

 

weeks ended

 

 

weeks ended

 

 

weeks ended

  

weeks ended

  

weeks ended

 

 

February 3,

 

 

January 28,

 

 

January 29,

 

 

February 2,

  

February 3,

  

January 28,

 

 

2019

 

 

2018

 

 

2017

 

 

2020

  

2019

  

2018

 

Net sales

 

 

100.0

%

 

100.0

%

 

100.0

%

  100.0%  100.0%  100.0%

Cost of sales

 

 

78.5

 

 

78.3

 

 

78.2

 

  81.3   78.5   78.3 

Gross profit

 

 

21.5

 

 

21.7

 

 

21.8

 

  18.7   21.5   21.7 

Selling and administrative expenses

 

 

13.4

 

 

14.1

 

 

14.4

 

  14.5   13.4   14.1 

Intangible asset amortization

 

 

0.3

 

 

0.3

 

 

0.5

 

  0.4   0.3   0.3 

Operating income

 

 

7.7

 

 

7.3

 

 

6.9

 

  3.7   7.7   7.3 

Other income (expense), net

 

 

0.1

 

 

0.3

 

 

0.1

 

  0.1   0.1   0.3 

Interest expense, net

 

 

0.2

 

 

0.2

 

 

0.2

 

  0.2   0.2   0.2 

Income before income taxes

 

 

7.5

 

 

7.4

 

 

6.8

 

  3.6   7.5   7.4 

Income taxes

 

 

1.7

 

 

2.8

 

 

2.4

 

  0.8   1.7   2.8 

Net income

 

 

5.8

 

 

4.6

 

 

4.4

 

  2.8   5.8   4.6 

 

Fiscal 20192020 Compared to Fiscal 20182019

Fiscal 2020 and 2019 results have been recast based on the re-composition of our operating segments during the fiscal 2020 fourthquarter.

 

Net Sales

 

 

Fifty-three weeks ended

      

Fifty-two weeks ended

              Fifty-two weeks ended     Fifty-three weeks ended          
 

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
     

% Net Sales

      

% Net Sales

              % Net Sales      % Net Sales         

Hooker Branded

 $178,710   26.2

%

 $166,754   26.9

%

 $11,956   7.2

%

 $161,990   26.4% $178,710   26.2% $(16,720)  -9.4%

Home Meridian

  387,825   56.7

%

  365,472   58.9

%

  22,353   6.1

%

  340,630   55.8%  387,825   56.7%  (47,195)  -12.2%

Domestic Upholstery

  95,670   15.7%  106,580   15.6%  (10,910)  -10.2%

All Other

  116,966   17.1

%

  88,406   14.2

%

  28,560   32.3

%

  12,534   2.1%  10,386   1.5%  2,148   20.7%

Consolidated

 $683,501   100.0

%

 $620,632   100.0

%

 $62,869   10.1

%

 $610,824   100% $683,501   100% $(72,677)  -10.6%

 

Unit Volume and Average Selling Price (“ASP”)

 

Unit Volume

 

FY19 % Increase/

-Decrease vs. FY18

 

Average Selling Price

 

FY19 % Increase/

-Decrease vs. FY18

 

 

FY20 % Increase/

-Decrease vs. FY19

 Average Selling Price 

FY20 % Increase/

-Decrease vs. FY19

 

 

 

 

 

 

 

 

         

Hooker Branded

 

 

6.5

%

Hooker Branded

 

 

0.2

%

  -16.6%

Hooker Branded

  9.7%

Home Meridian

 

 

3.5

%

Home Meridian

 

 

3.7

%

  -12.2%

Home Meridian

  -1.9%

Domestic Upholstery

  -13.8%

Domestic Upholstery

  3.8%

All Other

 

 

-3.9

%

All Other

 

 

6.7

%

  14.9%

All Other

  2.8%

Consolidated

 

 

3.5

%

Consolidated

 

 

2.9

%

  -12.7%

Consolidated

  1.3%

Consolidated net sales decreased $72.7 million or 10.6% compared to fiscal 2019 due primarily to $47.2 million or 12.2% net sales decrease in the Home Meridian segment, and to a lesser extent the decreases in the Hooker Branded segment and Domestic Upholstery, partially offset by a net sales increase in All Other. Fiscal 2020 had 52 weeks while fiscal 2019 had 53 weeks. The additional week in fiscal 2019 contributed approximately $13.4 million to consolidated net sales based on the average net sales per shipping day in the table below.

Hooker Branded segment net sales decreased $16.7 million or 9.4% due to decreased net sales in the Hooker Casegoods division, partially offset by a single-digit net sales increase in the Hooker Upholstery division. Decreased unit volume was attributable to lower incoming orders due to the soft retail environment. ASP increased due to price increases and lower discounting in response to the imposition of tariffs on goods imported from China and higher freight costs, as well as increased sales of higher-priced products at Hooker Upholstery. Net sales were negatively impacted by higher than expected quality, sales and advertising allowances.

Home Meridian segment net sales decreased $47.2 million or 12.2% driven by sales volume loss with one major customer and with traditional furniture chains, as well as higher than expected chargebacks from the same major customer, partially offset by continued net sales growth in the Samuel Lawrence Hospitality business and the absence of a large quality-related return in the fourth quarter of fiscal 2019. ASP decreased due to customer mix in the traditional channels.

Domestic Upholstery net sales decreased $10.9 million or 10.2% due to unit volume loss in all three domestic upholstery manufacturing divisions as the result of continued low incoming orders through fiscal 2020. ASP increased in all three divisions, especially with increased sales of higher-priced Bradington-Young and Shenandoah products, however, it was not sufficient to mitigate the volume loss.

All Other net sales increased $2.1 million or 20.7% due to a double-digit net sales increase at H Contract.

Because we report on a fiscal year that ends on the Sunday closest to January 31st of each year, the 2019 fiscal year was one week longer than the comparable 2020 fiscal year. The following table presents average net sales per shipping day in thousands for the 2020 and 2019 fiscal years:

  

Average Net Sales Per Shipping Day

     
  

Fifty-two weeks ended

  

Fifty-three weeks ended

  

%

 
  

February 2, 2020

  

February 3, 2019

  

Change

 

Hooker Branded

 $645  $698   -7.6%

Home Meridian

  1,357   1,515   -10.4%

Domestic Upholstery

  381   416   -8.4%

All Other

  50   41   22.0%

Consolidated

 $2,433  $2,670   -8.9%
             

Shipping Days

  251   256     

Gross Profit

  Fifty-two weeks ended      Fifty-three weeks ended             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      

% Segment Net Sales

      

% Segment Net Sales

         

Hooker Branded

 $51,462   31.8% $58,122   32.5% $(6,660)  -11.5%

Home Meridian

  36,936   10.8%  62,850   16.2%  (25,914)  -41.2%

Domestic Upholstery

  21,120   22.1%  22,503   21.1%  (1,383)  -6.1%

All Other

  4,440   35.4%  3,512   33.8%  928   26.4%

Consolidated

 $113,958   18.7% $146,987   21.5% $(33,029)  -22.5%

Consolidated gross profit decreased in absolute terms by $33.0 million and decreased as a percentage of net sales from 21.5% to 18.7% as compared to fiscal 2019.

Hooker Branded segment gross profit decreased both in absolute terms and as a percentage of net sales due to lower net sales and increased product costs, which were attributable to excess tariffs and higher freight costs, partially offset by price increases which helped mitigate the tariff impact as well as the absence of a $500,000 casualty loss we recognized in fiscal 2019.

Home Meridian segment gross profit decreased both in absolute terms and as a percentage of net sales due primarily to net sales decline and increased product costs and was exacerbated by higher quality-related expenses. Excess tariff costs and write-down of inventory with quality issues to market price had nearly $12 million adverse impact to gross profit. Increased warehousing and distribution costs to handle the inventory related to quality issues and higher freight costs incurred in hospitality projects also negatively impacted gross margin.

Domestic Upholstery segment gross profit decreased in absolute terms driven by lower net sales but increased as a percentage of net sales. Bradington Young and Shenandoah reported improved gross profit as a percentage of net sales, while Sam Moore gross profit stayed essentially flat as a percentage of its net sales. Our domestic upholstery manufacturing divisions gross margin benefitted from lower material costs and decreased benefits expenses due to lower medical claims, while negatively impacted by labor and manufacturing inefficiencies due to reduced production volume and sales of obsolete inventory.

Although a small part of our business, All Other contributed nearly $1.0 million increase to consolidated gross profit, which was attributable to strong sales and favorable product mix at H Contract.

Selling and Administrative Expenses

  

Fifty-two weeks ended

      

Fifty-three weeks ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      

% Segment Net Sales

      

% Segment Net Sales

         

Hooker Branded

 $29,949   18.5% $32,854   18.4% $(2,905)  -8.8%

Home Meridian

  42,771   12.6%  42,688   11.0%  83   0.2%

Domestic Upholstery

  13,433   14.0%  13,845   13.0%  (412)  -3.0%

All Other

  2,714   21.7%  2,541   24.5%  173   6.8%

  Consolidated

 $88,867   14.5% $91,928   13.4% $(3,061)  -3.3%

Consolidated selling and administrative expenses decreased in absolute terms but increased as a percentage of net sales in fiscal 2020.

Hooker Branded segment S&A expenses decreased in absolute terms due principally to decreased selling expenses and compensation costs as the result of lower net sales and profitability, decreased benefits expense due to lower employee medical costs and a gain on company-owned life insurance, and the recognition of a deferred gain related to the sale of a former distribution facility which we had owner-financed and was paid off during the first quarter. These decreases were partially offset by higher salaries and wages due to increased headcount and the absence of a $1.0 million life insurance gain recorded in fiscal 2019. Hooker Branded segment S&A expenses stayed essentially flat as a percentage of net sales due to lower net sales.

Home Meridian segment S&A expenses stayed flat in absolute terms and increased as a percentage of net sales. Increased labor costs related to the sourcing transition in Asia and the start-up costs for the new HMidea division were nearly offset by decreased selling expenses and compensation costs as the result of lower net sales and profitability as well as lower employee benefits expense. Home Meridian segment S&A expenses increased as a percentage of net sales due to lower net sales and higher S&A expenses.

Domestic Upholstery segment expenses decreased in absolute terms driven by lower selling expense and compensation costs due to lower net sales and earnings, as well as better spending control, partially offset by higher salaries and wages, and higher benefits expenses due to medical claims. Domestic Upholstery S&A expenses increased as a percentage of net sales due to lower net sales.

All Other S&A expenses increased in absolute terms due to higher selling expense as the result of increased H Contract net sales and earnings, and increased advertising supplies expenses to support the launch of Lifestyle Brands.

Intangible Asset Amortization

  

Fifty-two Weeks Ended

      

Fifty-three Weeks Ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      

% Net Sales

      

% Net Sales

         

Intangible asset amortization

 $2,384   0.4% $2,384   0.3% $-   0.0%

Intangible asset amortization expense was unchanged compared to the prior year period. See Note 10. Intangible Assets and Goodwill for additional information about our amortizable intangible assets.

Operating Income

  

Fifty-two weeks ended

      

Fifty-three weeks ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      % Segment Net Sales      % Segment Net Sales         

Hooker Branded

 $21,512   13.3% $25,269   14.1% $(3,757)  -14.9%

Home Meridian

  (7,169)  -2.1%  18,828   4.9%  (25,997)  -138.1%

Domestic Upholstery

  6,637   6.9%  7,607   7.1%  (970)  -12.8%

All Other

  1,727   13.8%  971   9.4%  756   77.9%

Consolidated

 $22,707   3.7% $52,675   7.7% $(29,968)  -56.9%

Operating profitability decreased both in absolute terms and as a percentage of net sales in fiscal 2020 compared to the same prior-year period due to the factors discussed above.

Interest Expense, net

  

Fifty-two Weeks Ended

      

Fifty-three Weeks Ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Interest expense, net

 $1,238   0.2% $1,454   0.2% $(216)  -14.9%

Consolidated interest expense in fiscal 2020 decreased due to lower balances on our term loans.

Income Taxes

  

Fifty-two weeks ended

      

Fifty-three weeks ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Consolidated income tax expense

 $4,844   0.8% $11,717   1.7% $(6,873)  -58.7%
                         

Effective Tax Rate

  22.1%      22.7%            

We recorded income tax expense of $4.8 million for fiscal 2020 compared to $11.7 million for the same prior year period. The effective tax rates for the fiscal 2020 and 2019 were 22.1% and 22.7%, respectively. Our effective tax rate was lower in fiscal 2020 due primarily to decreased state income taxes. We adopted ASU 2014-09 and ASU 2018-02 in the first quarter of fiscal 2019. The adoptions resulted in the reclassification of $120,000 from federal tax payable and $111,000 from Accumulated Other Comprehensive Income, both to retained earnings. See Note 17 “Income Taxes” for additional information about our income taxes.

Net Income and Earnings Per Share

  

Fifty-two weeks ended

      

Fifty-three weeks ended

             
  

February 2, 2020

      

February 3, 2019

      

$ Change

  

% Change

 
Net Income     % Net Sales      % Net Sales         

Consolidated

 $17,083   2.8% $39,873   5.8% $(22,790)  -57.2%
                         

Diluted earnings per share

 $1.44      $3.38             

Fiscal 2019 Compared to Fiscal 2018

The Shenandoah acquisition closed during the third quarter of fiscal 2018. Consequently, Domestic Upholstery segment’s fiscal 2018 results only included four-months of Shenandoah’s results beginning on September 29, 2017 through the end of our fiscal 2018 which ended on January 28, 2018.

Fiscal 2019 and 2018 results have been recast based on the re-composition of our operating segments during the fiscal 2020 fourth quarter.

Net Sales

  

Fifty-three weeks ended

      

Fifty-two weeks ended

             
  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Hooker Branded

 $178,710   26.2% $166,754   26.9% $11,956   7.2%

Home Meridian

  387,825   56.7%  365,472   58.9%  22,353   6.1%

Domestic Upholstery

  106,580   15.6%  78,392   12.6%  28,188   36.0%

All Other

  10,386   1.5%  10,014   1.6%  372   3.7%

Consolidated

 $683,501   100.0% $620,632   100.0% $62,869   10.1%

Unit Volume and Average Selling Price (“ASP”)

Unit Volume 

FY19 % Increase/

-Decrease vs. FY18

 Average Selling Price 

FY19 % Increase/

-Decrease vs. FY18

 
          

Hooker Branded

  6.5%

Hooker Branded

  0.2%

Home Meridian

  3.5%

Home Meridian

  3.7%

Domestic Upholstery

  -3.8%

Domestic Upholstery

  6.1%

All Other

  -5.0%

All Other

  10.7%

Consolidated

  3.5%

Consolidated

  2.9%

 

*Shenandoah is excluded from All OtherDomestic Upholstery segment in the Unit Volume and ASP tables above since only four months of its results was included in fiscal 2018. Consequently, we believe including its fiscal 2019 results would skew All Other’sthe segment’s results and reduce the usefulness of the table above.

 

 

Consolidated net sales increased $62.9 million or 10.1% compared to fiscal 2018. Fiscal 2019 had 53 weeks while fiscal 2018 and 2017 had 52 weeks. The additional week in fiscal 2019 increased consolidated net sales by $13.4 million based on the average net sales per shipping day in the table below.

 

Hooker Branded segment net sales increased $12.0 million or 7.2% primarily due to higher sales volume as the result of strong orders and expanded channels of distribution. Good in-stock positions on best-sellers supported steady shipments. Net sales also benefitted from favorable advertising costs, product mix, and increased sales of Hooker Upholstery sectionals, which had higher ASP.

 

Home Meridian segment net sales increased $22.4 million or 6.1% driven by higher unit volumes and ASP. We raised our selling prices in response to the previously mentioned tariff and increased product costs. Sales volume increased in four out of five business units due to increased sales into emerging channels. The net sales increase was partially offset by a sales decline in traditional channels and unfavorable returns and allowances in the fourth quarter of fiscal 2019.

 

All Other’sDomestic Upholstery segment net sales increased $28.6$28.2 million or 32.3%36.0% compared to fiscal 2018. Most of the increase was attributable to a full year of Shenandoah’s net sales being included in fiscal 2019 (as compared to only four months in the prior year) and to a lesser extent, strong sales at Bradington-Young, and H Contract, partially offset by a sales decrease at Sam Moore. ASP increased due to increased sales of higher-priced Bradington-Young luxury motion products. All Other’sDomestic Upholstery’s unit volume decreased due to the volume decline at Sam Moore.

All Other net sales increased due primarily to an upper single digit net sales increase at H Contract. Decreased unit volume and higher ASP was attributable to the absence of Homeware closeout in 2018.

 

Because we report on a fiscal year that ends on the Sunday closest to January 31st of each year, the 2019 fiscal year was one week longer than the comparable 2018 fiscal year. The following table presents average net sales per shipping day in thousands for the 2019 and 2018 fiscal years:

 

 

Average Net Sales Per Shipping Day

      

Average Net Sales Per Shipping Day

     
 

Fifty-three weeks ended

  

Fifty-two weeks ended

  

%

  

Fifty-three weeks ended

  

Fifty-two weeks ended

  

%

 
 

February 3, 2019

  

January 28, 2018

  

Change

  

February 3, 2019

  

January 28, 2018

  

Change

 

Hooker Branded

 $698  $664   5.1

%

 $698  $664   5.1%

Home Meridian

  1,515   1,456   4.0

%

  1,515   1,456   4.0%

Domestic Upholstery

  416   312   33.3%

All Other

  457   352   29.8

%

  41   40   2.5%

Consolidated

 $2,670  $2,472   8.0

%

 $2,670  $2,472   8.0%
                        

Shipping Days

  256   251       256   251     

 

Gross Profit

 

 

Fifty-three weeks ended

      

Fifty-two weeks ended

              

Fifty-three weeks ended

      

Fifty-two weeks ended

             
 

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
     

% Segment Net Sales

      

% Segment Net Sales

              % Segment Net Sales      % Segment Net Sales         

Hooker Branded

 $58,122   32.5

%

 $53,007   31.8

%

 $5,115   9.6

%

 $58,122   32.5% $53,007   31.8% $5,115   9.6%

Home Meridian

  62,850   16.2

%

  62,325   17.1

%

  525   0.8

%

  62,850   16.2%  62,325   17.1%  525   0.8%

Domestic Upholstery

  22,503   21.1%  16,228   20.7%  6,275   38.7%

All Other

  26,015   22.2

%

  19,485   22.0

%

  6,530   33.5

%

  3,512   33.8%  3,257   32.5%  255   7.8%

Consolidated

 $146,987   21.5

%

 $134,817   21.7

%

 $12,170   9.0

%

 $146,987   21.5% $134,817   21.7% $12,170   9.0%

 

 

Consolidated gross profit increased in absolute terms by $12.2 million and decreased slightly as a percentage of net sales in fiscal 2019.

 

Hooker Branded segment gross profit increased in absolute terms and as a percentage of net sales due to higher sales and lower product costs. Hooker Branded gross profit also benefited from favorable customer mix, driven by growth of ecommerce sales. The improved margin was negatively impacted by higher product costs, increased warehousing and freight costs due to increased inventory levels and a $500,000 casualty loss we recognized early this year.

 

Home Meridian segment gross profit increased slightly in absolute terms due to additional sales, but decreased as a percentage of net sales. Lower-margin orders due to unfavorable customer mix, inflation of product cost due to the implementation of the 10% tariff and higher product costs negatively impacted Home Meridian’s gross profit.

 

All OtherDomestic Upholstery segment gross profit increased in absolute terms and as a percentage of net sales primarily due to the addition of a full year of Shenandoah’s results in fiscal 2019. Bradington Young2019, and H Contract combined also contributed $1.0 million to a lesser extent solid gross profit increase at Bradington Young due to strong sales in these divisions.this division, as well as moderately lower direct labor and material costs. Despite a sales decline at Sam Moore, its gross profit stayed essentially flat in absolute terms and increased as a percentage of net sales.

All Other gross profit increased in absolute terms and as a percentage of net sales due to moderatelyincreased gross profit at H Contract and the absence of Homeware closeout sales at lower direct labor and material costs.margin in 2018.

 

Selling and Administrative Expenses

 

 

Fifty-three weeks ended

      

Fifty-two weeks ended

              

Fifty-three weeks ended

      

Fifty-two weeks ended

             
 

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
     

% Segment Net Sales

      

% Segment Net Sales

              % Segment Net Sales      % Segment Net Sales         

Hooker Branded

 $32,854   18.4

%

 $30,868   18.5

%

 $1,986   6.4

%

 $32,854   18.4% $30,868   18.5% $1,986   6.4%

Home Meridian

  42,688   11.0

%

  43,164   11.8

%

  (476

)

  -1.1

%

  42,688   11.0%  43,164   11.8%  (476)  -1.1%

Domestic Upholstery

  13,845   13.0%  11,015   14.1%  2,830   25.7%

All Other

  16,386   14.0

%

  13,247   15.0

%

  3,139   23.7

%

  2,541   24.5%  2,232   22.3%  309   13.8%

Consolidated

 $91,928   13.4

%

 $87,279   14.1

%

 $4,649   5.3

%

 $91,928   13.4% $87,279   14.1% $4,649   5.3%

 

Consolidated selling and administrative expenses increased in absolute terms but decreased as a percentage of net sales in fiscal 2019.

 

Hooker Branded segment S&A expenses increased in absolute terms and was primarily driven by higher compensation costs due to increased headcount, higher employee medical costs, and higher bonus and selling expenses due to increased sales and increased income. These increases were partially offset by a $1.0 million gain on company-owned life insurance recognized during the fiscal 2019 first quarter and the absence of $700,000 Shenandoah-acquisition related costs recorded in prior year period. Hooker Branded segment S&A expenses decreased as a percentage of net sales due to higher net sales.

 

Home Meridian segment S&A expenses decreased in absolute terms and as a percentage of net sales due to decreased bonus expense due to lower sales and earnings as compared to budget, decreased selling expenses on lower-margin orders, and lower bad debt expense in the current year due to the absence of a customer balance written off during the prior year period. These decreases were partially offset by increased employee compensation and benefits expenses.

 

All OtherDomestic Upholstery S&A expenses increased in absolute terms due primarily to the inclusion of a full year of Shenandoah’s operations in fiscal 2019. The increase was also driven by higher compensation, higher employee medical costs and higher professional services due to increased compliance costs. Sam Moorecosts, while partially offset by decreased S&A expenses decreased compared to the prior year periodat Sam Moore due to lower salesselling expenses and better spending control.

 

All Other S&A expenses increased in absolute terms and as a percentage of net sales due to increased selling expenses and compensation costs as the result of higher net sales, as well as increased salaries due to increased headcount at H Contract.

 

Intangible Asset Amortization

 

  Fifty-three Weeks Ended      Fifty-two Weeks Ended             
  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Intangible asset amortization

 $2,384   0.3% $2,084   0.3% $300   14.4%

 

Intangible asset amortization expense was higher in the fiscal 2019 due to the addition of Shenandoah acquisition-related amortization expense for the full year. The increase was partially offset by the short amortization period of certain short-lived Shenandoah acquisition-related intangible assets which was recorded in the fiscal 2018. See Note 10. Intangible Assets and Goodwill for additional information about our amortizable intangible assets.

 

Operating Income

 

 

Fifty-three weeks ended

      

Fifty-two weeks ended

              Fifty-three weeks ended    Fifty-two weeks ended          
 

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
     

%Segment Net Sales

      

%Segment Net Sales

              % Segment Net Sales      % Segment Net Sales         

Hooker Branded

 $25,269   14.1

%

 $22,139   13.3

%

 $3,130   14.1

%

 $25,269   14.1% $22,139   13.3% $3,130   14.1%

Home Meridian

  18,828   4.9

%

  17,828   4.9

%

  1,000   5.6

%

  18,828   4.9%  17,828   4.9%  1,000   5.6%

Domestic Upholstery

  7,607   7.1%  4,463   5.7%  3,144   70.4%

All Other

  8,578   7.3

%

  5,487   6.2

%

  3,091   56.3

%

  971   9.4%  1,024   10.2%  (53)  -5.2%

Consolidated

 $52,675   7.7

%

 $45,454   7.3

%

 $7,221   15.9

%

 $52,675   7.7% $45,454   7.3% $7,221   15.9%

 

Operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2019 compared to the same prior-year period due to the factors discussed above.

 

Interest Expense, net

 

  Fifty-three Weeks Ended      Fifty-two Weeks Ended             
  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Interest expense, net

 $1,454   0.2% $1,248   0.2% $206   16.5%

 

Consolidated interest expense in fiscal 2019 increased primarily due to higher interest rates on our variable-rate term loans, partially offset by the $10 million unscheduled loan payment made on the New Unsecured Term Loan in the first quarter of fiscal 2019.

 

 

Income Taxes

 

  

Fifty-three weeks ended

      

Fifty-two weeks ended

             
  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
      % Net Sales      % Net Sales         

Consolidated income tax expense

 $11,717   1.7% $17,522   2.8% $(5,805)  -33.1%
                         

Effective Tax Rate

  22.7%      38.3%            

 

We recorded income tax expense of $11.7 million for fiscal 2019 compared to $17.5 million for the same prior year period. The effective tax rates for the fiscal 2019 and 2018 were 22.7% and 38.3%, respectively. Our effective tax rate was lower in fiscal 2019 as a result of the recently enacted Tax Cuts and Jobs Act of 2017 as well as the absence of $1.8 million for the re-measurement of deferred tax assets and liabilities recorded in the fourth quarter of fiscal 2018, partially offset by increased state income taxes. We adopted ASU 2014-09 and ASU 2018-02 in the first quarter of fiscal 2019. The adoptions resulted in the reclassification of $120,000 from federal tax payable and $111,000 from Accumulated Other Comprehensive Income, both to retained earnings. See Note 2 “Summary of Significant Accounting Policies” for additional information on the adoptions of these accounting standards.

 

Net Income and Earnings Per Share

 

  

Fifty-three weeks ended

      

Fifty-two weeks ended

             
  

February 3, 2019

      

January 28, 2018

      

$ Change

  

% Change

 
Net Income     % Net Sales      % Net Sales         

Consolidated

 $39,873   5.8% $28,250   4.6% $11,623   41.1%
                         

Diluted earnings per share

 $3.38      $2.42             

 

Fiscal 2018 Compared to Fiscal 2017

The Shenandoah acquisition closed on September 29, 2017. Consequently, Shenandoah’s results are not included in our results prior to September 30, 2017. Additionally, fiscal 2018 and 2017 results have been recast based on the re-composition of our operating segments during the 2018 fourth quarter.

Net Sales

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Net Sales

      

% Net Sales

         

Hooker Branded

 $166,754   26.9

%

 $158,685   27.5

%

 $8,069   5.1

%

Home Meridian

  365,472   58.9

%

  344,635   59.7

%

  20,837   6.0

%

All Other

  88,406   14.2

%

  73,899   12.8

%

  14,507   19.6

%

Consolidated

 $620,632   100.0

%

 $577,219   100.0

%

 $43,413   7.5

%

Unit Volume and Average Selling Price

Unit Volume

 

FY18 % Increase/

-Decrease vs. FY17

 

Average Selling Price

 

FY18 % Increase/

-Decrease vs. FY17

 

 

 

 

 

 

 

 

 

 

 

Hooker Branded

 

 

5.3

%

Hooker Branded

 

 

0.0

%

Home Meridian

 

 

14.8

%

Home Meridian

 

 

-7.4

%

All Other

 

 

19.5

%

All Other

 

 

-0.5

%

Consolidated

 

 

13.8

%

Consolidated

 

 

-5.4

%

Consolidated net sales increased in all reportable segments in fiscal 2018, led by increases in the Home Meridian segment and in All Other. Nearly 80% of All Other’s net sales increase was due to inclusion of Shenandoah’s post-acquisition sales in the last four months of the 2018 fiscal year. The increases in consolidated unit sales were partially offset by a decline in consolidated average selling prices (ASP). The Home Meridian segment’s unit volume increased primarily due to increased sales to mega and e-commerce accounts, which experienced significant year-over-year sales increases. The decrease in Home Meridian segment ASP was attributable to customer mix and growth in ecommerce sales, which tend to be lower priced products. Hooker Branded segment unit volume increased due to sales growth at Hooker Upholstery and increased Hooker Casegoods shipments in the fourth quarter. Unit volume in All Other increased primarily due to the inclusion of Shenandoah’s post-acquisition sales, and to a lesser extent, increased sales at Bradington-Young.

Gross Profit

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Segment Net Sales

      

% Segment Net Sales

         

Hooker Branded

 $53,007   31.8

%

 $51,653   32.6

%

 $1,354   2.6

%

Home Meridian

  62,325   17.1

%

  57,289   16.6

%

  5,036   8.8

%

All Other

  19,485   22.0

%

  17,179   23.2

%

  2,306   13.4

%

Consolidated

 $134,817   21.7

%

 $126,121   21.8

%

 $8,696   6.9

%

Consolidated gross profit increased in absolute terms and stayed flat as percentage of net sales in fiscal year 2018 due to increased net sales and gross profit in both reportable segments and in All Other. Home Meridian segment gross profit increased both in absolute terms and as a percentage of net sales primarily due to increased net sales and countermeasures management implemented to improve the margin. All Other gross profit increased due primarily to the addition of Shenandoah’s results. Hooker Branded segment gross profit increased due to net sales increases, lower product costs and a one-time vendor concession due to a prior year quality issue at Hooker Upholstery, partially offset by decreased Hooker casegoods gross profit due to increased cost of goods sold and returns and allowances.

Selling and Administrative Expenses

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Segment Net Sales

      

% Segment Net Sales

         

Hooker Branded

 $30,868   18.5

%

 $31,182   19.7

%

 $(314

)

  -1.0

%

Home Meridian

  43,164   11.8

%

  39,468   11.5

%

  3,696   9.4

%

All Other

  13,247   15.0

%

  12,536   17.0

%

  711   5.7

%

Consolidated

 $87,279   14.1

%

 $83,186   14.4

%

 $4,093   4.9

%

Consolidated selling and administrative (S&A) expenses increased in absolute terms primarily due to higher compensation, benefits and bonus expenses, the addition of Shenandoah’s operations for the last four months of our fiscal year and $800,000 in Shenandoah acquisition-related costs in the current year. These increases were partially offset by the absence of $1.2 million in Home Meridian acquisition-related costs from the prior year. Home Meridian segment S&A expenses increased primarily due to higher compensation and bonus expense on improved earnings, increased professional services due to increased compliance costs and higher bad debt expense due to the write-off of a customer balance during fiscal 2018. All Other S&A expense increased in absolute terms but decreased as a percentage of net sales. The increase was attributable to the inclusion of Shenandoah expenses, partially offset by decreased S&A at Sam Moore, due primarily to lower selling expenses, and at Homeware due to its closure in 2018. Hooker Branded segment S&A decreased in both absolute terms and as a percentage of net sales, due to the absence of approximately $1.2 million in HMI acquisition-related expenses and lower bad debts expense, partially offset by the inclusion of approximately $800,000 in Shenandoah acquisition-related costs, increased salaries and benefits expense, and increased selling expenses at Hooker Upholstery due to higher sales.

Intangible Asset Amortization

  

Fifty-two Weeks Ended

      

Fifty-two Weeks Ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Net Sales

      

% Net Sales

         

Intangible asset amortization

 $2,084   0.3

%

 $3,134   0.5

%

 $(1,050

)

  100.0

%

Intangible asset amortization expense was higher in the prior year period due to the short amortization period of some of Home Meridian’s acquisition-related intangible assets. The decrease was partially offset by intangible asset amortization expense recognized on Shenandoah acquisition-related intangibles. See Note 10. Intangible Assets for additional information on our amortizable intangible assets.

Operating Income

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

%Segment Net Sales

      

%Segment Net Sales

         

Hooker Branded

 $22,139   13.3

%

 $20,472   12.9

%

 $1,667   8.1

%

Home Meridian

  17,828   4.9

%

  14,687   4.3

%

  3,141   21.4

%

All Other

  5,487   6.2

%

  4,642   6.3

%

  845   18.2

%

Consolidated

 $45,454   7.3

%

 $39,801   6.9

%

 $5,653   14.2

%

Operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2018 compared to the same prior-year period due to the factors discussed above.

Interest Expense, net

  

Fifty-two Weeks Ended

      

Fifty-two Weeks Ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Net Sales

      

% Net Sales

         

Interest expense, net

 $1,248   0.2

%

 $954   0.2

%

 $294   30.8

%

Consolidated interest expense in fiscal year 2018 increased primarily due to increases in the interest rates on our variable-rate term loans and interest expense on the new term loan in connection with the Shenandoah acquisition.

Income Taxes

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 
      

% Net Sales

      

% Net Sales

         

Consolidated income tax expense

 $17,522   2.8

%

 $13,909   2.4

%

 $3,613   26.0

%

                         

Effective Tax Rate

  38.3

%

      35.5

%

            

We recorded income tax expense of $17.5 million during fiscal 2018, compared to $13.9 million for fiscal 2017, due primarily to additional tax expense of $1.8 million for the re-measurement of deferred tax assets and liabilities as the result of the Tax Cuts and Jobs Act. The effective income tax rates for the two fiscal years were 38.3% and 35.5%, respectively. Our effective tax rate was higher in fiscal 2018 due to the Tax Act impact and proceeds received on officer life insurance in fiscal 2017 that did not recur in fiscal 2018.

Net Income and Earnings Per Share

  

Fifty-two weeks ended

      

Fifty-two weeks ended

             
  

January 28, 2018

      

January 29, 2017

      

$ Change

  

% Change

 

Net Income

     

% Net Sales

      

% Net Sales

         

Consolidated

 $28,250   4.6

%

 $25,287   4.4

%

 $2,963   11.7

%

                         

Diluted earnings per share

 $2.42      $2.18             

Financial Condition, Liquidity and Capital Resources

 

Summary Cash Flow Information – Operating, Investing and Financing Activities

 

 

Fifty-Three Weeks Ended

  

Fifty-Two Weeks Ended

  

Fifty-Two Weeks Ended

  Fifty-Two Weeks Ended  Fifty-Three Weeks Ended  Fifty-Two Weeks Ended 
 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 

Net cash provided by operating activities

 $9,662  $27,746  $31,240  $41,429  $9,662  $27,746 

Net cash used in investing activities

  (4,511

)

  (36,483

)

  (88,061

)

  (4,254)  (4,511)  (36,483)

Net cash (used in) provided by financing activities

  (24,631

)

  (140

)

  42,691 

Net decrease in cash and cash equivalents

 $(19,480

)

 $(8,877

)

 $(14,130

)

Net cash used in financing activities

  (12,579)  (24,631)  (140)

Net increase (decrease) in cash and cash equivalents

 $24,596  $(19,480) $(8,877)

During fiscal 2020, we used some of the $41.4 million generated from operations and $1.4 million proceeds received from a note receivable to pay $7.2 million cash dividends, $6.4 million principal payments and interest towards our term loans, $5.1 million in capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities and $590,000 insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees, to facilitate business continuity and to serve as a funding mechanism for certain executive benefits.

 

During fiscal 2019, $9.7 million generated from operations, $1.2 million life insurance proceeds and cash on hand helped make $17.9 million in principal payments on our term loans, $6.7 million in cash dividends, $5.2 million capital expenditures, and $652,000 insurance premiums on Company-owned life insurance policies. Company-owned life insurance policies are in place to compensate us for the loss

 

During fiscal 2018, $27.7 million generated from operations, cash on hand, and $12.0 million term-loan proceeds helped partially fund the Shenandoah acquisition, make $6.3 million long-term debt payments, $5.8 million in cash dividends, fund $3.2 million capital expenditures to enhance our business systems and facilities and pay $673,000 insurance premiums on Company-owned life insurance policies.

 

During fiscal 2017, cash generated from operations, cash on hand, term-loan proceeds and insurance proceeds helped fund the HMI acquisition, pay $12.3 million in long-term debt payments, pay $4.9 million in cash dividends and fund $2.5 million of capital expenditures to enhance our business systems and facilities and to pay $715,000 in premiums on Company-owned life insurance policies.

Liquidity, Financial Resources and Capital Expenditures

 

Our financial resources include:

 

available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance;

expected cash flow from operations; and

available lines of credit.credit; and

cash surrender value of Company-owned life-insurance.

 

We believe these resources are sufficient to meet our business requirements through fiscal 20202021 and for the foreseeable future, including:

 

limited capital expenditures;

working capital;

the payment of regular quarterly cash dividends on our common stock; and

the servicing of our acquisition-related debt.

 

Loan AgreementsAgreements and Revolving Credit Facility

 

We currently have one unsecured term loan and one secured term loan outstanding and a revolving credit facility. The term loans are related to the Home Meridian acquisition. A second unsecured term loan, used to partially fund the Shenandoah acquisition, was paid off during fiscal 2019. Details of our loan agreements and revolving credit facility are outlined below.

 

Original Loan Agreement

 

On February 1, 2016, we entered into an amended and restated loan agreement (the “Original Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the closing of the Home Meridian Acquisition. Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the Home Meridian Acquisition.

 

Details of the individual credit facilities provided for in the Original Loan Agreement were as follows:

 

Unsecured revolving credit facility. The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

 

Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and

 

Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amounts borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement.

 

 

New Loan Agreement

 

On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement:

 

amended and restated the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility (the “Existing Revolver”), Unsecured Term Loan, and Secured Term Loan all remain outstanding under the New Loan Agreement; and

 

provided us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). Amounts outstanding under the New Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must repay the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 or the expiration of the Existing Revolver, at , which time all amounts outstanding under the New Unsecured Term Loan will become due and payable. We may prepay the outstanding principal amount under the New Unsecured Term Loan,we subsequently paid off in full or in part, on any interest payment date without penalty. On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan to partially fund the cash consideration used in the Shenandoah acquisition.fiscal 2019.

 

The New Loan Agreement also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

 

Maintain a ratio of funded debt to EBITDA not exceeding:

o

2.50:1.0 through August 31, 2018;

o

2.25:1.0 through August 31, 2019; and

o

2.00:1.00 thereafter.

A basic fixed charge coverage ratio of at least 1.25:1.00; and

Limit capital expenditures to no more than $15.0 million during any fiscal year beginning in fiscal 2020.

 

The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement.

 

We were in compliance with each of these financial covenants at February 3, 20192, 2020 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have financial resources to weather the expected short-term impacts of COVID-19; however, an extended impact may materially and adversely affect our sales, earnings and liquidity.

 

Due to our strong cash position, we paid off remaining amounts due under the New Unsecured Term Loan in fiscal 2019. As of February 3, 2019, $18.4 million was outstanding under the Unsecured Term Loan, and $17.1 million was outstanding under the Secured Term Loan.

Revolving Credit Facility Availability

 

As of February 3, 2019,2, 2020, we had an aggregate $27.7$25.7 million available under the Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $2.3$4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of February 3, 2019.2, 2020. There were no additional borrowings outstanding under the Existing Revolver as of February 3, 2019.2, 2020.

Expected Refinancing in Fiscal 2021

All amounts outstanding on our terms loans and revolving credit facility are due and payable on the first day of fiscal 2022, February 1, 2021. We expect to refinance any amounts outstanding under these loans and credit facility during fiscal 2021. However, if the negative economic effects of COVID-19 persist, it would likely have a material adverse effect on our sales, earnings and liquidity. Consequently, our credit rating may decrease and refinancing our debt may be more difficult and loans more costly.

 

Capital Expenditures

 

We expectPrior to the COVID-19 crisis, we expected to spend between $4$2.5 million to $6$4.5 million in capital expenditures in fiscal 20202021 to maintain and enhance our operating systems and facilities. However, due to the negative economic effects of COVID-19, we have delayed indefinitely about $3 million in non-critical capital spending.

 

COVID-19 Cost Cutting and Cash Preservation Measures

In early fiscal 2021, we initiated certain measures to reduce operating expenses and preserve cash which include temporary  fee reductions for our Board of Directors,  temporary salary reductions for officers and certain other managers, strategic staff reductions, the temporary closure of our domestic manufacturing plants and the furlough of manufacturing, warehouse and administrative associates, delaying all non-critical capital spending, rationalizing current import purchase orders, working with our vendors to cut costs and extend payment terms where we can.

During fiscal 2020, our cash position increased by nearly $25 million over the prior-year and we added an additional $17 million in cash through mid-April 2020.

 

Share Repurchase Authorization

 

During fiscal 2013, our Board of Directors authorized the repurchase of up to $12.5 million of the Company’s common shares. The authorization doesdid not obligate us to acquire a specific number of shares during any period and doesdid not have an expiration date, but it may becould have been modified, suspended or discontinued at any time at the discretion of our Board of Directors. Repurchases may behave been made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and were subject to our cash requirements for other purposes, compliance with the covenants under the loan agreement for our revolving credit facility and other factors we deemdeemed relevant. No shares were purchased during fiscal 2019.2020. Approximately $11.8 million remainsremained available for future purchases under the authorization as of February 3, 2019.2, 2020. In April 2020 (fiscal 2021), our Board of Directors terminated this repurchase authorization after several years of inactivity.

 

Dividends

 

We declared and paid dividends of $0.57$0.61 per share or approximately $6.7$7.2 million in fiscal 2020, an increase of 7.0% or $0.04 per share compared to $0.57 per share in fiscal 2019. On March 3, 20192, 2020 our Board of Directors declared a quarterly cash dividend of $0.15$0.16 per share, payable on March 29, 201931, 2020 to shareholders of record at March 18, 2019.17, 2020.

 

Commitments and Contractual Obligations

 

As of February 3, 2019,2, 2020, our commitments and contractual obligations were as follows:

 

  

Cash Payments Due by Period (In thousands)

 
  

Less than

          

More than

     
  

1 Year

  

1-3 Years

  

3-5 Years

  

5 years

  

Total

 

Long Term Debt (1)

 $5,857  $29,651  $-  $-  $35,508 

Deferred compensation payments (2)

  684   2,080   2,148   5,023   9,935 

Operating leases (3)

  7,778   12,546   6,022   588   26,934 

Total contractual cash obligations

 $14,319  $44,277  $8,170  $5,611  $72,377 

  

Cash Payments Due by Period (In thousands)

 
  

Less than

          

More than

     
  

1 Year

  

1-3 Years

  

3-5 Years

  

5 years

  

Total

 

Long Term Debt (1)

 $5,856  $24,282  $-  $-  $30,138 

Deferred compensation payments (2)

  728   2,067   2,220   4,853   9,868 

Operating leases (3)

  7,934   12,769   10,609   15,205   46,517 

   Total contractual cash obligations

 $14,518  $39,118  $12,829  $20,058  $86,523 

(1)

These amounts represent obligations due under the Unsecured Term Loan and the Secured Term Loan. See Note 1213 to the consolidated financial statements beginning on page F-25 for additional information about our long-term debt obligations.

 

(2)

These amounts represent estimated cash payments to be paid to participants in our SRIP through fiscal year 2043, which is 15 years after the last current SRIP plan participant is assumed to have retired. SERP benefits are paid over the lifetimes of plan participants, so the year of final payment is unknown. The present value of these benefits (the actuarially derived projected benefit obligation for the SRIP and SERP) were approximately $9.6$10.3 million and $1.8$1.9 million, respectively, at February 3, 2019,2, 2020, and are shown on our consolidated balance sheets, with $684,000$729,000 recorded in current liabilities and $10.7$11.4 million recorded in long-term liabilities. Under the SRIP, the monthly retirement benefit for each participant, regardless of age, would become fully vested and the present value of that benefit would be paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. See Note 1314 to the consolidated financial statements beginning on page F-27F-26 for additional information about the SRIP and SERP.

 

(3)

These amounts represent estimated cash payments due under operating leases for real estate utilized in our operations and warehouse and office equipment.equipment, as well as short term leases with remaining terms less than 12 months. See Note 12 for additional information and disclosures about our leases.

 

Off-Balance Sheet Arrangements 

 

Standby letters of credit in the aggregate amount of $2.3$4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of February 3, 2019.2, 2020. See the “Commitments and Contractual Obligations” table above and Note 1819 to the consolidated financial statements included in this annual report on Form 10-K for additional information on our off-balance sheet arrangements.

 

Substantially all of the cash value of our company owned life insurance is pledged as collateral for our secured term loan.

 

Recently Issued Accounting Pronouncements

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in this update change the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the FASB considers pertinent. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect the adoption of ASU 2018-14 will have a material impact on our consolidated financial statements or disclosures.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). This update seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The amendments will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which guidance is effective, which is a modified-retrospective approach. We are currently evaluatinghave finalized our analysis of the effectsstandard and do not believe the adoption of adopting thisthe standard will have a material effect on our consolidated financial statements and results of operations.

 

In February 2016,COVID-19

As discussed under "Item 1A. Risk Factors," an outbreak of COVID-19 was identified in China and has subsequently been recognized as a global pandemic by the FASB issued ASU 2016-02, Leases, which, among other things, requires lessees to recognize leases on-balance sheetWorld Health Organization. Federal, state and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognitionlocal governments in the income statement. The lease liability recognized will be equalU.S and elsewhere have imposed restrictions on travel and business operations and are advising or requiring individuals to limit or eliminate time outside of their homes. Temporary closures of businesses have also been ordered in certain jurisdictions and other businesses have temporarily closed  voluntarily. These actions have expanded significantly over the past month throughout the United States. Consequently, the COVID-19 outbreak has severely restricted the level of economic activity in the U.S. and around the world.

We monitor information on COVID-19 from the CDC and believe we are adhering to their recommendations regarding the health and safety of our personnel. To address the potential human impact of the virus, most of our administrative staff are telecommuting. For those administrative staff not telecommuting and our warehouse and domestic manufacturing employees, we have implemented appropriate social distancing policies and have stepped-up facility cleaning at each location. Non-essential domestic travel for our employees has ceased and international travel has been prohibited out-right. Testing and treatment for COVID-19 is covered 100% under our medical plan and counseling is available through our employee assistance plan to assist employees with financial, mental and emotional stress related to the present value of lease paymentsvirus and other issues. In addition, we are offering temporary paid leave to employees diagnosed with the right-of-use asset will be based onvirus (and those associates with another diagnosed person or persons in their household) and are working to accommodate associates with child-care issues related to school or day-care closures.

To begin to address the lease liability, subject to adjustment such as for initial direct costs. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginningfinancial impact of the earliest comparative period presented invirus, we have delayed non-essential capital spending and have implemented other cost-cutting measures, including abbreviated shifts, furloughs, the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on February 4, 2019 and will use the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to us. To date, we identified alltemporary closure of our leases, the majoritydomestic manufacturing plants, staff reductions, temporary fee reductions for our Board of which areDirectors, temporary salary reductions for real estate used inofficers and other managers, rationalizing current import purchase orders and working with our operations, completed our search for embedded leases in our contractsvendors to cut costs and agreements and completed the calculationsextend payment terms where we can.

 

Outlook

 

The COVID-19 pandemic presents an economic challenge of unprecedented proportions with an uncertain time frame. Due to these aforementioned effects of COVID-19, we have seen decreased demand for home furnishings in our industry and for our company. We have been ablealso seen a spike in order cancellations over the last few weeks prior to mitigate muchfiling this Annual Report, which has blunted some of the strong backlog we had at fiscal year-end. While we built significant cash last year and have enhanced our cash position further in fiscal 2021, some customers have taken or are expected to take extended payment terms and we expect cash collections to slow. Lower earnings will also have a negative impact on our cash position.

Because of these factors, we are preparing for a significant downturn lasting anywhere from four to six months. We expect sales and earnings to be down materially in the fiscal 2021 first quarter and for fiscal 2021, both as compared to prior-year periods, but we are unable to reasonably estimate the extent of those decreases. Additionally, we have limited insight into the extent to which our business may be impacted by the COVID-19 pandemic and there are many unknowns including the severity and duration of the current crisis.

Further delays in the receipt of goods and other unanticipated impacts to our supply chain, including on direct imports or goods purchased domestically, or our customers, could have a more significant impact on our future business (including sales). The extent of the impact of the 10% tariff, thanks to the cooperation of our supply partnerswill depend on future developments, which are highly uncertain and our customers. With the possibility of the tariff increasing to 25% at a future date, we willcannot be predicted. We continue to monitor the situation closely and may implement further measures to provide additional financial flexibility as we work to mitigate the impact of the tariffs by re-sourcing manufacturing in non-tariff countries, without compromising the qualityprotect our cash position and service our customers expect.liquidity.

 

Our management team remains focused on building a responsive, focused organization, which drives success and high performance, but is instilled with the culture and values that have contributed to our success for nearly ninety-five years. Adaptation, the ability to react to challenges in the short-term and change strategies, or develop new strategies over the longer-term, are an important part of that culture. We believe we have an organization ready to face a changing global market and to leverage change into new opportunities for growth.

Many long-term macro-economic indicators are positive and developments in the housing market, including more affordable mortgage rates, a near-record level of home remodeling activity and the highest rate of homeownership in five years are especially encouraging. However, we have seen a softening of demand and retail activity in the first two months of fiscal 2020. For the fiscal 2019 fourth quarter, incoming orders were essentially flat, but in fiscal February and March, incoming orders were down in the low double digits on a consolidated basis, with backlogs similarly deflated versus the same period in the prior year. Based on industry dynamics and the macro-economic outlook for the year, we expect these are short-term headwinds and remain confident in our business model and strategies and our strategic execution. We believe our diversified business model allows us to perform well through economic fluctuations and we are making the investments needed in products, programs, systems and people to continue to perform at a high level.

Critical Accounting Policies and Estimates

 

Our significant accounting policies are described in “Note 2 – Summary of Significant Accounting Policies” to the consolidated financial statements beginning at page F-11F-10 in this report. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that actual results will deviate materially from our estimates related to our accounting policies described below. However, because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates.

 

Purchase Price Allocation. For the Shenandoah acquisition, we allocated the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the estimate of remaining useful lives of acquired assets, we engaged a third-party appraisal firm. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

 

Revenue Recognition.Recognition. We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container.

 

The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period.

 

Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.

 

Leases. Our lease assets are composed of real estate and equipment. Real estate leases consist primarily of warehouses, showrooms and offices, while equipment leases consist of vehicles, office and warehouse equipment. At the inception of a contract, we assess whether the contract is, or contains, a lease. Our assessment is based on: (a) whether there is an identified asset in the contract that is land or a depreciable asset – i.e. property, plant or equipment; (b) whether we have the right to control the use of the identified asset throughout the period of use, which may be different from the overall contract term; and (c) whether we have the right to direct the use of an identified asset if it can direct (and change) how and for what purpose the asset will be used throughout the period of use.

Leases are classified as either finance leases or operating leases based on criteria in Topic 842. All of our leases are classified as operating leases. We do not currently have finance leases but could in the future.

Operating lease right-of-use ("ROU") assets and liabilities are recognized on the adoption date based on the present value of lease payments over the remaining lease term. As interest rates are not explicitly stated or implicit in any of our leases, we utilized our incremental borrowing rate at the adoption date of February 4, 2019, which was one-month LIBOR plus 1.5%. For leases without explicitly stated or implicit interest rates that commenced after the adoption date, we used our incremental borrowing rate which was one-month LIBOR at the lease commencement date plus 1.5%. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

At the inception of a lease, we allocate the consideration in the contract to each lease and non-lease component based on the component's relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Some of our real estate leases contain variable lease payments, including payments based on the percentage increase in the Consumer Price Index for Urban Consumers (“CPI-U”). We used February 2019 CPI-U issued by the US Department of Labor’s Bureau of Labor Statistics to measure lease payments and calculate lease liabilities upon adoption of this standard. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred.

We have a sub-lease at one of our warehouses. In accordance with the provisions of Topic 842, since we have not been relieved as the primary obligor of the warehouse lease, we cannot net the sublease income against our lease payment to calculate the lease liability and ROU asset. Our practice has been, and we will continue to, straight-line the sub-lease income over the term of the sublease.

Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend the leases for up to seven years. We have elected not to recognize ROU assets and lease liabilities that arise from short term leases for any class of underlying asset. Short term leases are leases with lease terms of 12 months or less with either (a) no renewal option or (b) a renewal option which we are not reasonably certain to exercise.

 

Impairment of Long-Lived Assets 

 

Tangible and Definite Lived Intangible Assets

 

We regularly review our property, plant and equipment and definite lived intangible assets for indicators of impairment, as specified in the Accounting Standards Codification. Although not exhaustive, this accounting guidance lists potential indicators of impairment, which we use to facilitate our review. These potential indicators of impairment include:

 

A significant decrease in the market value of the long-lived asset;

A significant adverse change in the extent or manner in which a long-lived asset group is being used, or in its physical condition;

A significant adverse change in the legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator;

An accumulation of costs significantly in excess of the amount originally expected to acquire or construct a long-lived asset;

A current period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with the long-lived asset’s use; and

A current expectation that more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

 

When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of income and consolidated balance sheets.

 

When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less.

 

Intangible Assets and Goodwill

 

We own both definite-lived (amortizable) assets and indefinite-lived intangible assets. Our amortizable intangible assets are related to the Home Meridian and Shenandoah acquisitions and include customer relationships, backlog and trademarks. Our indefinite lived assets include goodwill, trademarks and tradenames related to the Home Meridian and Shenandoah acquisitions, as well as the Bradington-Young and Sam Moore tradenames. We may acquire additional amortizable assets and/or indefinite lived intangible assets in the future. Our indefinite-lived intangible assets are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired.

 

 

Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include, but are not limited to:

 

a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy;

significant changes in demand for our products;

loss of key personnel; and

the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal.

 

The fair value of our trademarks and tradenames is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess.

 

At February 3, 2019,2, 2020, the fair values of our Bradington-Young, Home Meridian, Sam Moore and Shenandoah non-amortizable trademarks and trade names exceeded their carrying values. Based an independent valuation conducted at the 2020 fiscal year-end the fair values of the Pulaski Furniture, Samuel Lawrence Furniture and Prime Resources International trademarks exceeded their carrying values by $130,000, $10,000 and $10,000, respectively.

 

The goodwill impairment test consists of a two-step process, if necessary. However, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test outlined in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing quantitative assessment. The quantitative assessment involves estimating the implied fair value of our goodwill using projected future cash flows that are discounted using a weighted average cost of capital analysis that reflects current market conditions. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. In addition to our qualitative assessment, management performed a quantitative analysis on the Home Meridian reporting  unit’s goodwill in the fiscal 2020 fourth quarter. Based on our qualitative assessment as described above,and quantitative analysis, we have concluded that our goodwill is not impaired as of February 3, 2019.2, 2020.

 

The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition.

 

Concentrations of Sourcing Risk

 

In fiscal 2019,2020, imported products sourced from Vietnam and China accounted for nearly all of our import purchases and our top five suppliers in Vietnam and China account for approximately half of our fiscal 20192020 import purchases. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. If such a disruption were to occur, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Virginia, North Carolina and California to adequately meet demand for several months or slightly longer with an additional month’s worth of demand available for immediate shipment from our warehouses in Asia. We believe that we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to six months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, raw materials price risk and changes in foreign currency exchange rates, which could impact our results of operations or financial condition. We manage our exposure to this risk through our normal operating activities.

 

Interest Rate Risk

 

In conjunction with the Shenandoah acquisition, we entered into new financing arrangements as described in "Note 1213 Long-Term Debt" included in Part II, Item 8. “Financial Statements” of this Form 10-K. Borrowings under the revolving credit facility and the Unsecured Term Loan bear interest based on LIBOR plus 1.5% and borrowings under the Secured Term Loan bear interest based on LIBOR plus 0.5%. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of February 3, 2019,2, 2020, other than standby letters of credit in the amount of $2.3$4.3 million. However, as of February 3, 2019, $35.52, 2020, $30.1 million was outstanding under our term loans. A 1% increase in the LIBOR rate would result in an annual increase in interest expense on our termsterm loans of approximately $328,000.$270,000.

 

Raw Materials Price Risk

 

We are exposed to market risk from changes in the cost of raw materials used in our domestic upholstery manufacturing processes; principally, wood, fabric and foam products.  Increases in home construction activity could result in increases in wood and fabric costs. Additionally, the cost of petroleum-based foam products we utilize are sensitive to crude oil prices, which vary due to supply, demand and geo-political factors.

 

Currency Risk

 

For imported products, we generally negotiate firm pricing denominated in U.S. Dollars with our foreign suppliers, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Most of our imports are purchased from suppliers located in Vietnam and China. The Chinese currency floats within a limited range in relation to the U.S. Dollar, resulting in exposure to foreign currency exchange rate fluctuations.

 

Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effect of any price increases from suppliers in the prices we charge for imported products. However, these changes could adversely impact sales volume or profit margins during affected periods.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements listed in Item 15(a), and which begin on page F-5, of this report are incorporated herein by reference and are filed as a part of this report.

 

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.     CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended February 3, 2019.2, 2020. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of February 3, 2019,2, 2020, the end of the period covered by this annual report, to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. 

 

Management’s Annual Report on Internal Control over Financial Reporting

 

In accordance with Section 404 of the Sarbanes-Oxley Act and SEC rules thereunder, management has conducted an assessment of our internal control over financial reporting as of February 3, 2019,2, 2020, based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s report regarding that assessment is included on page F-2 of this report, with our consolidated financial statements, and is incorporated herein by reference.

 

Report of Registered Public Accounting Firm

 

Our independent registered public accounting firm, KPMG LLP, audited the consolidated financial statements included in this annual report on Form 10-K and has issued an audit report on the effectiveness of our internal control over financial reporting. KPMG’s report is included on page F-3 and F-4 of this report, with our consolidated financial statements, and is incorporated herein by reference.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the fiscal quarter ended February 3, 2019,2, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.      OTHER INFORMATION     

 

None.

 

 

Hooker Furniture Corporation

Part III

 

In accordance with General Instruction G (3) of Form 10-K, most of the information called for by Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders scheduled to be held June 12, 201911, 2020 (the “2019“2020 Proxy Statement”), as set forth below.

 

ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information relating to our directors will be set forth under the caption “Proposal One-Election of Directors” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

Information relating to our executive officers is included in Part I of this report under the caption “Executive Officers of Hooker Furniture Corporation”“Information about our Executive Officers” and is incorporated herein by reference.

 

Information relating to compliance with Section 16(a) of the Exchange Act will be set forth under the caption “Section“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

Information relating to the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions will be set forth under the caption “Code of Business Conduct and Ethics” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

Information relating to material changes, if any, in the procedures by which shareholders may recommend nominees for our Board of Directors will be set forth under the caption “Procedures for Shareholder Recommendations of Director Nominees” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

Information relating to the Audit Committee of our Board of Directors, including the composition of the Audit Committee and the Board’s determinations concerning whether certain members of the Audit Committee are “financial experts” as that term is defined under Item 407(d)(5) of Regulation S-K will be set forth under the captions “Corporate Governance” and “Audit Committee” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

ITEM 11.      EXECUTIVE COMPENSATION

 

Information relating to this item will be set forth under the captions “Report of the Compensation Committee,” “Executive Compensation” and “Director Compensation” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

Information relating to this item will be set forth under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information relating to this item will be set forth in the last two paragraphs under the caption “Audit Committee” and the caption “Corporate Governance” in the 20192020 Proxy Statement and is incorporated herein by reference.

 

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information relating to this item will be set forth under the caption “Proposal Two-Three- Ratification of Selection of Independent Registered Public Accounting Firm” in the 20192020 Proxy Statement and is incorporated herein by reference. 

 

 

Hooker Furniture Corporation

Part IV

 

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)     Documents filed as part of this report on Form 10-K:

(a)

Documents filed as part of this report on Form 10-K:

(1)

The following reports and financial statements are included in this report on Form 10-K:

Management’s Report on Internal Control Over Financial Reporting

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of February 3, 2019 and January 28, 2018.

Consolidated Statements of Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017.

Consolidated Statements of Comprehensive Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017.

Consolidated Statements of Cash Flows for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017.

Consolidated Statements of Shareholders’ Equity for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017.

 

Management’s Report on Internal Control Over Financial Reporting

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of February 2, 2020 and February 3, 2019

Consolidated Statements of Income for the fifty-two-week period ended February 2, 2020, the fifty-three-week period ended February 3, 2019 and the fifty-two-week period ended January 28, 2018

Consolidated Statements of Comprehensive Income for the fifty-two-week period ended February 2, 2020, the fifty-three-week period ended February 3, 2019 and the fifty-two-week period ended January 28, 2018

Consolidated Statements of Cash Flows for the fifty-two-week period ended February 2, 2020, the fifty-three-week period ended February 3, 2019 and the fifty-two-week period ended January 28, 2018

Consolidated Statements of Shareholders’ Equity for the fifty-two-week period ended February 2, 2020, the fifty-three-week period ended February 3, 2019 and the fifty-two-week period ended January 28, 2018

Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules:

 

Financial Statement Schedules have been omitted because the information required has been separately disclosed in the consolidated financial statements or related notes.

(b)

Exhibits:

2.1

2.1

Asset Purchase Agreement by and between the Company and Home Meridian International, Inc., dated as of January 5, 2016 (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on January 7, 2016)

2.2

Asset Purchase Agreement, dated as of September 6, 2017, by and among Hooker Furniture Corporation, Shenandoah Furniture Corporation, Gideon C. Huddle and Candace H. Payne (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017)

3.1

Amended and Restated Articles of Incorporation of the Company, as amended March 28, 2003 (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended February 28, 2003)

3.2

Amended and Restated Bylaws of the Company as amended December 10, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-K (SEC File No. 000-25349) for the fiscal year ended February 2, 2014)

4.1

Amended and Restated Articles of Incorporation of the Company (See Exhibit 3.1)

4.2

Amended and Restated Bylaws of the Company (See Exhibit 3.2)

3.1

Amended and Restated Articles of Incorporation of the Company, as amended March 28, 2003 (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended February 28, 2003)

3.2

Amended and Restated Bylaws of the Company as amended December 10, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-K (SEC File No. 000-25349) for the fiscal year ended February 2, 2014)

4.1

Amended and Restated Articles of Incorporation of the Company (See Exhibit 3.1)

4.2

Amended and Restated Bylaws of the Company (See Exhibit 3.2)

4.3

Description of the Company’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (filed herewith).

 

Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments, if any, evidencing long-term debt not exceeding 10% of the Company’s total assets have been omitted and will be furnished to the Securities and Exchange Commission upon request.

 

10.1(a)

Form of Executive Life Insurance Agreement dated December 31, 2003, between the Company and certain of its executive officers (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended February 29, 2004)*

 

10.1(b)

Form of Outside Director Restricted Stock Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on January 17, 2006)*

10.1(c)

2015 Amendment and Restatement of the Hooker Furniture Corporation Stock Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement dated March 1, 2015 (SEC File No. 000-25349))*

10.1(d)

2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income Plan, dated as of June 8, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended October 31, 2010)*

10.1(e)

Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*

10.1(f)

Form of Performance Grant Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*

10.1(i)

Employment Agreement, dated June 4, 2018, between Anne Jacobsen and the Company (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(j)

Employment Agreement, dated June 25, 2018, between Donald Lee Boone and the Company (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(k)

Employment Agreement, dated June 4, 2018, between Jeremy Hoff and the Company (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(l)

Employment Agreement, dated June 4, 2018, between Douglas Townsend and the Company (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

 

10.1(m)

Form of Performance Share Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on May 11, 2018)*

10.1

First Amendment to the 2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income plan (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed with the SEC on November 15, 2019)

10.2(a)

Security Agreement (Assignment of Life Insurance Policy as Collateral), dated as of February 1, 2016, between Bank of America, N.A. and the Company (incorporated by referenced to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 2, 2016)

10.2(b)

Second Amended and Restated Loan Agreement, dated as of September 29, 2017, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017)

10.2(c)

First Amendment to Second Amended and Restated Loan Agreement, dated as of February 1, 2019, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC. (incorporated by reference to Exhibit 10.2(d) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 19,2019)

21

List of Subsidiaries:

Bradington-Young LLC, a North Carolina limited liability company

Home Meridian Group, LLC, a Virginia limited liability company

Sam Moore Furniture LLC, a Virginia limited liability company

23

Consent of Independent Registered Public Accounting Firm (filed herewith)

31.1

Rule 13a-14(a) Certification of the Company’s principal executive officer (filed herewith)

31.2

Rule 13a-14(a) Certification of the Company’s principal financial officer (filed herewith)

32.1  

Rule 13a-14(b) Certification of the Company’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101

The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2020, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated  statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, (v) consolidated statements of shareholders’ equity and (vi) the notes to the consolidated financial statements, tagged as blocks of text (filed herewith)

*Management contract or compensatory plan

ITEM 16.          FORM 10-K SUMMARY

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOOKER FURNITURE CORPORATION

April 17, 2020

By:

/s/ Paul B. Toms, Jr.

Paul B. Toms, Jr.

Chairman and Chief Executive Officer

 

10.1(c)

2015 Amendment and Restatement of the Hooker Furniture Corporation Stock Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement dated March 1, 2015 (SEC File No. 000-25349))*

10.1(d)

2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income Plan, dated as of June 8, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended October 31, 2010)*

10.1(e)

Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*

10.1(f)

Form of Performance Grant Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)*

10.1(g)

Employment Agreement, dated August 22, 2011, between Michael W. Delgatti, Jr. and the Company(incorporated by reference to Exhibit 10.1(l) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 13, 2012)*

10.1(h)

Employment Agreement, dated January 5, 2016, between George Revington and the Company (incorporated by reference to Exhibit 10.1(l) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 15, 2016)*

10.1(i)

Employment Agreement, dated June 4, 2018, between Anne Jacobsen and the Company (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(j)

Employment Agreement, dated June 25, 2018, between Donald Lee Boone and the Company (incorporated by reference to Exhibit 10.2 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(k)

Employment Agreement, dated June 4, 2018, between Jeremy Hoff and the Company (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(l)

Employment Agreement, dated June 4, 2018, between Douglas Townsend and the Company (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)*

10.1(m)

Form of Performance Share Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on May 11, 2018)*

10.2(a)

Amended and Restated Loan Agreement, dated as of February 1, 2016, between Bank of America, N.A., the Company, Bradington-Young, LLC and Same Moore Furniture LLC (incorporated by referenced to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 2, 2016)

10.2(b)

Security Agreement (Assignment of Life Insurance Policy as Collateral), dated as of February 1, 2016, between Bank of America, N.A. and the Company (incorporated by referenced to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 2, 2016)

10.2 (c)

Second Amended and Restated Loan Agreement, dated as of September 29, 2017, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017)

10.2 (d)

First Amendment to Second Amended and Restated Loan Agreement, dated as of February 1, 2019, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC. (filed herewith)

 

21

List of Subsidiaries:

Bradington-Young LLC, a North Carolina limited liability company

Home Meridian Group, LLC, a North Carolina limited liability company

Sam Moore Furniture LLC, a Virginia limited liability company

23

Consent of Independent Registered Public Accounting Firm (filed herewith)

31.1

Rule 13a-14(a) Certification of the Company’s principal executive officer (filed herewith)

31.2

Rule 13a-14(a) Certification of the Company’s principal financial officer (filed herewith)

32.1

Rule 13a-14(b) Certification of the Company’s principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101

The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2019, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, (v) consolidated statements of shareholders’ equity and (vi) the notes to the consolidated financial statements, tagged as blocks of text (filed herewith)

*Management contract or compensatory plan

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

ITEM 16.          FORM 10-K SUMMARY

None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

HOOKER FURNITURE CORPORATIONSignature

 

Title

Date

 

 

 

 

April 19, 2019

By:

/s/ Paul B. Toms, Jr.

Paul B. Toms, Jr.

Chairman and Chief Executive Officer

 

/s/ Paul B. Toms, Jr.

 

Chairman, Chief Executive Officer and

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantApril 17, 2020

     Paul B. Toms, Jr.

Director (Principal Executive Officer)

/s/ Paul A. Huckfeldt

Senior Vice President - Finance and in the capacities and on the dates indicated.Accounting

 

Signature

Title

Date

/s/ Paul B. Toms, Jr.

Chairman, Chief Executive Officer and

April 19, 2019

 Paul B. Toms, Jr.

Director (Principal Executive Officer)

/s/ Paul A. Huckfeldt

Senior Vice President - Finance and Accounting

April 19, 2019

 Paul A. Huckfeldt

and Chief Financial Officer (Principal

Financial and Accounting Officer)

/s/ W. Christopher Beeler, Jr.

Director

April 19, 2019

April 17, 2020

     Paul A. Huckfeldt

and Chief Financial Officer (Principal

Financial and Accounting Officer)

/s/ W. Christopher Beeler, Jr.

Director

April 17, 2020

     W. Christopher Beeler, Jr.

/s/ Paulette Garafalo

Director

April 17, 2020

     Paulette Garafalo

/s/ John L. Gregory, III

Director

April 17, 2020

     John L. Gregory, III

/s/ Tonya H. Jackson

Director

April 17, 2020

     Tonya H. Jackson

/s/ E. Larry Ryder

Director

April 17, 2020

     E. Larry Ryder

/s/ Ellen C. Taaffe

Director

April 17, 2020

     Ellen C. Taaffe

/s/ Henry G. Williamson, Jr

.

Director

April 17, 2020

     Henry G. Williamson, Jr.

 

 

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

/s/ Paulette Garafalo

Director

April 19, 2019

 Paulette Garafalo

/s/ John L. Gregory, III

Director

April 19, 2019

 John L. Gregory, III

/s/ Tonya H. Jackson

Director

April 19, 2019

 Tonya H. Jackson

/s/ E. Larry Ryder

Director

April 19, 2019

 E. Larry Ryder

/s/ Ellen C. Taaffe

Director

April 19, 2019

 Ellen C. Taaffe

/s/ Henry G. Williamson, Jr.

Director

April 19, 2019

 Henry G. Williamson, Jr.

 

Page

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Management’s Report on Internal Control Over Financial Reporting

F-2

 

 

Reports of Independent Registered Public Accounting Firm

F-3

Consolidated Balance Sheets as of February 3, 2019 and January 28, 2018

F-5

Consolidated Statements of Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017

F-6

Consolidated Statements of Comprehensive Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017

F-7

Consolidated Statements of Cash Flows for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017

F-8

Consolidated Statements of Shareholders’ Equity for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017

F-9

Notes to Consolidated Financial Statements

F-10

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Shareholders of

Hooker Furniture Corporation

Martinsville, Virginia

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under that framework, management concluded that the Company’s internal control over financial reporting was effective as of February 3, 2019.

The effectiveness of the Company’s internal control over financial reporting as of February 3, 2019 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.

Paul B. Toms, Jr.

Chairman and Chief Executive Officer

(Principal Executive Officer)

April 19, 2019

Paul A. Huckfeldt

Senior Vice President – Finance and Accounting

and Chief Financial Officer

(Principal Financial and Accounting Officer)

April 19, 2019

Report of Independent Registered Public Accounting Firm

F-3

 

To the Shareholders and Board of Directors
Hooker Furniture Corporation:

 

Opinion on the ConsolidatedFinancial Statements

We have audited the accompanying consolidated balance sheets of Hooker Furniture Corporation and subsidiaries (the Company) Balance Sheets as of February 2, 2020 and February 3, 2019 and January 28, 2018,

F-5

Consolidated Statements of Income for the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each offifty-two-week period ended February 2, 2020, the years in the three-yearfifty-three-week period ended February 3, 2019 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 2019 andfifty-two-week period ended January 28, 2018 and

F-6

Consolidated Statements of Comprehensive Income for the results of its operations and its cash flows for each offifty-two-week period ended February 2, 2020, the years in the three-yearfifty-three-week period ended February 3, 2019 in conformity with U.S. generally accepted accounting principles.and the fifty-two-week period ended January 28, 2018

F-7

 

We also have audited, in accordance with

Consolidated Statements of Cash Flows for the standards offifty-two-week period ended February 2, 2020, the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as offifty-three-week period ended February 3, 2019 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 19, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulationsfifty-two-week period ended January 28, 2018

F-8

Consolidated Statements of Shareholders’ Equity for the Securities and Exchange Commissionfifty-two-week period ended February 2, 2020, the fifty-three-week period ended February 3, 2019 and the PCAOB.fifty-two-week period ended January 28, 2018

F-9

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit

Notes to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.Consolidated Financial Statements

F-10

/s/ KPMG LLP

We have served as the Company’s auditor since 2003.

Raleigh, North Carolina
April 19, 2019

 

 

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Shareholders of

Hooker Furniture Corporation

Martinsville, Virginia

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under that framework, management concluded that the Company’s internal control over financial reporting was effective as of February 2, 2020.

The effectiveness of the Company’s internal control over financial reporting as of February 2, 2020 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.

Paul B. Toms, Jr.

Chairman and Chief Executive Officer

(Principal Executive Officer)

April 17, 2020

Paul A. Huckfeldt

Senior Vice President – Finance and Accounting

and Chief Financial Officer

(Principal Financial and Accounting Officer)

April 17, 2020

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors
Hooker Furniture Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Hooker Furniture Corporation and subsidiaries (the Company) as of February 2, 2020 and February 3, 2019,  the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended February 2, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 2, 2020 and February 3, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended February 2, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 2, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 17, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2003.

Raleigh, North Carolina
April 17, 2020

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Directors
Hooker Furniture Company:Corporation:

 

Opinion on Internal Control Over Financial Reporting

 

We have audited Hooker Furniture Corporation and subsidiaries’ (the Company) internal control over financial reporting as of February 3, 2019,2, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2019,2, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 2, 2020 and February 3, 2019, and January 28, 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended February 3, 2019,2, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated April 19, 201917, 2020 expressed an unqualified opinion on those consolidated financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and Limitations of Internal Control Over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/S/ KPMG LLP

 

Raleigh, North Carolina
April 19, 201917, 2020

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

As of

 

February 3,

  

January 28,

  

February 2,

  

February 3,

 
 

2019

  

2018

  

2020

  

2019

 

Assets

                

Current assets

                

Cash and cash equivalents

 $11,435  $30,915  $36,031  $11,435 

Trade accounts receivable, net

(See notes 6 and 7)

  112,557   92,803   87,653   112,557 

Inventories (see note 8)

  105,204   84,459   92,813   105,204 

Income tax recoverable

  751   - 

Prepaid expenses and other current assets

  5,735   5,314   4,719   5,735 

Total current assets

  234,931   213,491   221,967   234,931 

Property, plant and equipment, net

  29,482   29,249 

Property, plant and equipment, net (See note 9)

  29,907   29,482 

Cash surrender value of life insurance policies (See note 11)

  23,816   23,622   24,888   23,816 

Deferred taxes (See note 16)

  4,522   3,264 

Deferred taxes (See note 17)

  2,880   4,522 

Operating leases right-of-use assets (See note 12)

  39,512   - 

Intangible assets, net (See note 10)

  35,755   38,139   33,371   35,755 

Goodwill (See notes 4 and 10)

  40,058   40,058   40,058   40,058 

Other assets

  1,152   2,235   1,125   1,152 

Total non-current assets

  134,785   136,567   171,741   134,785 

Total assets

 $369,716  $350,058  $393,708  $369,716 
                

Liabilities and Shareholders’ Equity

                

Current liabilities

                

Current portion of term loans

 $5,829  $7,528  $5,834  $5,829 

Trade accounts payable

  40,838   32,685   25,493   40,838 

Accrued salaries, wages and benefits

  8,002   9,218   4,933   8,002 

Income tax accrual (See note 16)

  3,159   3,711 

Income tax accrual (See note 17)

  -   3,159 

Customer deposits

  3,023   4,293   3,351   3,023 

Current portion of lease liabilities

  6,307   - 

Other accrued expenses

  3,564   2,894   4,211   3,564 

Total current liabilities

  64,415   60,329   50,129   64,415 

Long term debt (See note 12)

  29,628   45,778 

Deferred compensation (See note 13)

  11,513   11,164 

Pension plan (See note 13)

  -   2,441 

Long term debt (See note 13)

  24,282   29,628 

Deferred compensation (See note 14)

  11,382   11,513 

Lease liabilities

  33,794   - 

Other liabilities

  984   886   -   984 

Total long-term liabilities

  42,125   60,269   69,458   42,125 

Total liabilities

  106,540   120,598   119,587   106,540 
                

Shareholders’ equity

                

Common stock, no par value, 20,000 shares authorized,

11,785 and 11,762 shares issued and outstanding on each date

  49,549   48,970 

Common stock, no par value, 20,000 shares authorized,

11,838 and 11,785 shares issued and outstanding on each date

  51,582   49,549 

Retained earnings

  213,380   180,122   223,252   213,380 

Accumulated other comprehensive income

  247   368 

Accumulated other comprehensive (loss) income

  (713)  247 

Total shareholders’ equity

  263,176   229,460   274,121   263,176 

Total liabilities and shareholders’ equity

 $369,716  $350,058  $393,708  $369,716 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017.

 

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

       
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 
                        

Net sales

 $683,501  $620,632  $577,219  $610,824  $683,501  $620,632 
                        

Cost of sales

  536,014   485,815   451,098   496,866   536,014   485,815 

Casualty loss

  500   -   -   -   500   - 
                        

Gross profit

  146,987   134,817   126,121   113,958   146,987   134,817 
                        

Selling and administrative expenses

  91,928   87,279   83,186   88,867   91,928   87,279 

Intangible asset amortization

  2,384   2,084   3,134   2,384   2,384   2,084 
                        

Operating income

  52,675   45,454   39,801   22,707   52,675   45,454 
                        

Other income, net

  369   1,566   349   458   369   1,566 

Interest expense, net

  1,454   1,248   954   1,238   1,454   1,248 
                        

Income before income taxes

  51,590   45,772   39,196   21,927   51,590   45,772 
                        

Income taxes

  11,717   17,522   13,909   4,844   11,717   17,522 
                        

Net income

 $39,873  $28,250  $25,287  $17,083  $39,873  $28,250 
                        
                        

Earnings per share:

                        

Basic

 $3.38  $2.42  $2.19  $1.44  $3.38  $2.42 

Diluted

 $3.38  $2.42  $2.18  $1.44  $3.38  $2.42 
                        

Weighted average shares outstanding:

                        

Basic

  11,759   11,633   11,531   11,784   11,759   11,633 

Diluted

  11,783   11,663   11,563   11,838   11,783   11,663 
                        
                        

Cash dividends declared per share

 $0.57  $0.50  $0.42  $0.61  $0.57  $0.50 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017.

 

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.
       
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 
                        

Net Income

 $39,873  $28,250  $25,287  $17,083  $39,873  $28,250 

Other comprehensive income (loss):

                        

Gain on pension plan settlement

  (520)  -   - 

Income tax effect on settlement

  124   -   - 

Amortization of actuarial (loss) gain

  (305

)

  (144

)

  551   (740)  (305)  (144)

Income tax effect on amortization

  73   26   (204

)

  176   73   26 

Adjustments to net periodic benefit cost

  (232

)

  (118

)

  347   (960)  (232)  (118)
                        

Reclassification of tax effects due to the adoption of ASU 2018-02

  111   -   -   -   111   - 
                        

Total Comprehensive Income

 $39,752  $28,132  $25,634  $16,123  $39,752  $28,132 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017.

 

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

       
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 

Operating Activities:

                        

Net income

 $39,873  $28,250  $25,287  $17,083  $39,873  $28,250 

Adjustments to reconcile net income to net cash

provided by operating activities:

                        

Depreciation and amortization

  7,442   6,647   8,000   7,100   7,442   6,647 

Gain on pension settlement

  (520)  -   - 

(Gain)/Loss on disposal of assets

  (73

)

  571   (72

)

  (271)  (73)  571 

Proceeds from Casualty Loss

  409   -   -   -   409   - 

Deferred income tax (benefit) expense

  (1,221

)

  4,110   (2,224

)

Deferred income tax expense (benefit)

  1,940   (1,221)  4,110 

Non-cash restricted stock and performance awards

  1,284   1,175   1,157   1,296   1,284   1,175 

Provision for doubtful accounts and sales allowances

  (799

)

  (531

)

  2,188   (435)  (799)  (531)

Gain on life insurance policies

  (748

)

  (582

)

  (964

)

  (831)  (748)  (582)

Changes in assets and liabilities:

                        

Trade accounts receivable

  (17,982

)

  2,908   (20,467

)

  25,339   (17,982)  2,908 

Inventories

  (21,323

)

  (6,776

)

  6,016   12,391   (21,323)  (6,776)

Income tax recoverable

  (751)  -   - 

Prepaid expenses and other current assets

  267   (1,067

)

  (115

)

  (557)  267   (1,067)

Trade accounts payable

  8,130   (4,623

)

  4,662   (15,349)  8,130   (4,623)

Accrued salaries, wages and benefits

  (1,643

)

  129   1,950   (3,070)  (1,643)  129 

Accrued income taxes

  (672

)

  (612

)

  3,966   (3,159)  (672)  (612)

Customer deposits

  (1,270

)

  (339

)

  1,147   328   (1,270)  (339)

Operating lease liabilities

  299   -   - 

Other accrued expenses

  604   (696

)

  2,303   645   604   (696)

Deferred compensation

  (2,757

)

  (1,151

)

  (1,715

)

  (49)  (2,757)  (1,151)

Other long-term liabilities

  141   333   121   -   141   333 

Net cash provided by operating activities

  9,662   27,746   31,240   41,429   9,662   27,746 
                        

Investing Activities:

                        

Acquisitions

  -   (32,773

)

  (86,062

)

  -   -   (32,773)

Purchases of property, plant and equipment

  (5,214

)

  (3,166

)

  (2,454

)

  (5,129)  (5,214)  (3,166)

Proceeds received on notes receivable

  119   120   146   1,449   119   120 

Proceeds from sale of property and equipment

  11   9   2   16   11   9 

Premiums paid on life insurance policies

  (652

)

  (673

)

  (715

)

  (590)  (652)  (673)

Proceeds received on life insurance policies

  1,225   -   1,022   -   1,225   - 

Net cash used in investing activities

  (4,511

)

  (36,483

)

  (88,061

)

  (4,254)  (4,511)  (36,483)
                        

Financing Activities:

                        

Proceeds from long-term debt

  -   12,000   60,000   -   -   12,000 

Payments for long-term debt

  (17,917

)

  (6,285

)

  (12,290

)

  (5,368)  (17,917)  (6,285)

Debt issuance cost

  -   (39

)

  (165

)

  -   -   (39)

Cash dividends paid

  (6,714

)

  (5,816

)

  (4,854

)

  (7,211)  (6,714)  (5,816)

Net cash (used in) provided by financing activities

  (24,631

)

  (140

)

  42,691 

Net cash used in financing activities

  (12,579)  (24,631)  (140)
                        

Net decrease in cash and cash equivalents

  (19,480

)

  (8,877

)

  (14,130

)

Net increase (decrease) in cash and cash equivalents

  24,596   (19,480)  (8,877)

Cash and cash equivalents at the beginning of year

  30,915   39,792   53,922   11,435   30,915   39,792 

Cash and cash equivalents at the end of year

 $11,435  $30,915  $39,792  $36,031  $11,435  $30,915 
                        

Supplemental schedule of cash flow information:

                        

Interest paid, net

 $1,338  $1,135   848  $993  $1,338   1,135 

Income taxes paid, net

  13,613   14,122  $12,164   6,818   13,613  $14,122 
                        

Supplemental schedule of noncash investing activities:

                        

Acquisition cost paid in common stock

 $-  $8,396   20,267  $-  $-   8,396 

Increase in lease liabilities arising from obtaining right-of-use assets

  625   -   - 

Increase in property and equipment through accrued purchases

  23   58   -   5   23   58 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands, except per share data)

For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017.

 

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

For the 52 Week Period Ended February 2, 2020, the 53 Week Period Ended February 3, 2019 and the 52 Week Period Ended January 28, 2018.

             

Accumulated

                
             

Other

  

Total

              

Accumulated

     
 

Common Stock

  

Retained

  

Comprehensive

  

Shareholders'

              

Other

  

Total

 
 

Shares

  

Amount

  

Earnings

  

Income

  

Equity

  

Common Stock

  

Retained

  

Comprehensive

  

Shareholders'

 

Balance at January 31, 2016

  10,818  $18,667  $137,255  $139  $156,061 
                     

Shares

  

Amount

  

Earnings

  

Income / (Loss)

  

Equity

 

Net income

          25,287       25,287 

Unrealized gain on defined benefit plan, net of tax of $204

              347   347 

Cash dividends paid and accrued ($0.42 per share)

          (4,854

)

      (4,854

)

Stock issued for acquisition

  717   20,267           20,267 

Restricted stock grants, net of forfeitures

  28   423           423 

Restricted stock compensation cost

      396           396 

Balance at January 29, 2017

  11,563  $39,753  $157,688  $486  $197,927   11,563  $39,753  $157,688  $486  $197,927 
                                        

Net income

          28,250       28,250           28,250       28,250 

Unrealized loss on defined benefit plan, net of tax of $26

              (118

)

  (118

)

              (118)  (118)

Cash dividends paid and accrued ($0.50 per share)

          (5,816

)

      (5,816

)

          (5,816)      (5,816)

Stock issued for acquisition

  176   8,396           8,396   176   8,396           8,396 

Restricted stock grants, net of forfeitures

  23   432           432   23   432           432 

Restricted stock compensation cost

      389           389       389           389 

Balance at January 28, 2018

  11,762  $48,970  $180,122  $368  $229,460   11,762  $48,970  $180,122  $368  $229,460 
                                        

Net income

         $39,873      $39,873          $39,873      $39,873 

Prior year adjustment for ASU 2014-09 and 2018-02

          99  $111   210           99  $111   210 

Unrealized loss on defined benefit plan, net of tax of $73

              (232

)

  (232

)

             $(232)  (232)

Cash dividends paid and accrued ($0.57 per share)

          (6,714

)

      (6,714

)

          (6,714)      (6,714)

Restricted stock grants, net of forfeitures

  23  $(30

)

          (30

)

  23  $(30)          (30)

Restricted stock compensation cost

     $609           609      $609           609 

Balance at February 3, 2019

  11,785  $49,549  $213,380  $247  $263,176   11,785  $49,549  $213,380  $247  $263,176 
                    

Net income

         $17,083      $17,083 

Gain on pension settlement, net of tax of $124

             $(396)  (396)
Unrealized loss on defined benefit plan, net of tax of $176             $(564)  (564)

Cash dividends paid and accrued ($0.61 per share)

          (7,211)      (7,211)

Restricted stock grants, net of forfeitures

  53  $344           344 

Restricted stock compensation cost

     $790           790 

Recognition of PSUs as equity-based awards

     $899           899 

Balance at February 2, 2020

  11,838  $51,582  $223,252  $(713) $274,121 

 

See accompanying Notes to Consolidated Financial Statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

For the Fifty-ThreeFifty-Two Weeks Ended February 3, 20192, 2020

 

 

NOTE 1 – RECENTLY ADOPTED ACCOUNTING STANDARDS ADOPTED IN FISCAL 2019

 

In February 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 was issued in response to concerns regarding current accounting guidance that requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income. Consequently, the stranded tax effects would not reflect the appropriate tax rate. The amendments of this ASU allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical federal corporate income tax rate of 35.0% and the newly enacted corporate income tax rate of 21.0%. We adopted ASU 2018-02 in the first quarter of fiscal 2019. The adoption resulted in the reclassification of $111,000 from accumulated other comprehensive income to retained earnings in the first quarter of fiscal 2019.

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and reduce diversity in practice, cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (a) the fair value of the modified award is the same immediately before and after the modification; (b) the vesting conditions of the modified award are the same immediately before and after the modification; and (c) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. We adopted the amendments in ASU 2017-09 as of the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not have an impact upon our financial condition or results of operations.

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”).Previously net benefit cost was reported as an employee cost within operating income.  The amendment requires the bifurcation of net benefit cost.  The service cost component will be presented with the other employee compensation costs in operating income.  The other components will be reported separately outside of operations and will not be eligible for capitalization.  The amendment is effective for public entities for the annual reporting period beginning after December 15, 2017.  The guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost (including gains and losses on curtailments and settlements, and termination benefits paid through plans), and on a prospective basis for the capitalization of only the service cost component of net benefit cost.  Amounts capitalized into assets prior to the date of adoption should not be adjusted through a cumulative effect adjustment, but should continue to be recognized in the normal course, as for example, inventory is sold or fixed assets are depreciated. We adopted ASU 2017-17 as of the beginning of our 2019 fiscal year on January 29, 2018. Please see Note 13 Employee Benefit Plans for the impact on our financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (a) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (b) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 apply prospectively and became effective for us at the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not impact our financial statements.

In August 2016, the FASB issued ASU 2016-15, StatementNo. 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees to recognize lease right-of-use assets and liabilities on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. We adopted Topic 842 standard on February 4, 2019 and used the effective date transition method. As a result, our condensed consolidated balance sheets prior to February 4, 2019 were not restated and continue to be reported under previous guidance that did not require the recognition of Cash Flows (Topic 230): Classificationlease liabilities and corresponding lease assets on the condensed consolidated balance sheets. In addition, we have elected the package of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Its objective ispractical expedients, which allowed us not to reduce existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costsreassess prior conclusions related to debt prepaymentsthe expired or extinguishments, payments representing accreted interest on discounted debt, paymentsexisting leases, and not to reassess the accounting for initial direct costs. As a result of contingent consideration after a business combination, proceeds from insurance claimsthe adoption of Topic 842, we have operating lease right-of-use assets of $39.5 million and company-owned life insurance and distributions from equity method investees, among others. We adopted ASU 2016-15operating lease liabilities of $40.1 million as of the beginning of our 2019 fiscal year on January 29, 2018.February 2, 2020. The adoption of this guidanceTopic 842 did not have a material impact uponon our financial condition or resultscondensed consolidated statements of operations.income and condensed consolidated statement of cash flows for the fiscal 2020. See Note 12 for additional information and disclosures required by Topic 842.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This new standard replaced most existing revenue recognition guidance in GAAP and codified guidance under FASB Topic 606. The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. We adopted ASU No. 2014-09 as of January 29, 2018 using the modified retrospective method. As a result of adopting Topic 606, we recorded an increase to retained earnings of approximately $210,000, net of tax, as of January 29, 2018, due to the cumulative effect related to the change in accounting for shipments with synthetic FOB destination shipping terms. Results for the reporting period beginning after January 29, 2018 are presented under Topic 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under previous guidance. However, given the nature of our products and our sales terms and conditions, with the exception of sales with synthetic FOB destination shipping terms which are immaterial, the timing and amount of revenue recognized based on the underlying principles of ASU No. 2014-09 are consistent with our revenue recognition policy under previous guidance.

 

NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Hooker Furniture Corporation and subsidiaries (the “Company,” “we,” “us” and “our”) design, import, manufacture and market residential household furniture, hospitality and contract furniture for sale to wholesale and retail merchandisers located principally in North America.

 

Consolidation

 

The consolidated financial statements include the accounts of Hooker Furniture Corporation and our wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. All references to the Company refer to the Company and our consolidated subsidiaries, unless specifically referring to segment information.

 

Operating Segments

 

As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:

 

better understand our performance;

better assess our prospects for future net cash flows; and

make more informed judgments about us as a whole.

 

We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.

 

For financial reporting purposes, we are organized into twothree operating segments and “All Other”, which includes the remainder of our businesses:

 

Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; 

Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; and

All OtherDomestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore and Shenandoah Furniture,Furniture; and

All Other, consisting of H Contract and Homeware, two businesses started in 2013. NoneLifestyle Brands. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

  

Cash and Cash Equivalents

 

We consider cash on hand, demand deposits in banks and all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.

 

Trade Accounts Receivable

 

Accounts receivable are reported net of the allowance for doubtful accounts and sales-related allowances. Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, and consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. We regularly review and revise accounts receivable for doubtful accounts and customer allowances based upon historical bad debts and customer allowances and any agreements with specific customers. If the financial condition of a customer or customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt allowances may be required. In the event a receivable is determined to be potentially uncollectible, we engage collection agencies or law firms to attempt to collect amounts owed to us after all internal collection attempts have ended. Once we have determined the receivable is uncollectible, it is charged against the allowance for doubtful accounts.

 

Business Combinations-Purchase Price Allocation

 

For business combinations, we allocate the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the estimate of remaining useful lives of acquired assets, we may engage a third-party appraisal firm. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.

 

Fair Value Measurements

 

We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We determine fair value based on assumptions that we believe market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

Level 2 Inputs: Observable inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

Fair Value of Financial Instruments

 

The carrying value of certain of our financial instruments (cash and cash equivalents, trade accounts receivable and payable, and accrued liabilities) approximates fair value because of the short-term nature of those instruments. The carrying value of Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period. See Note 11 for details.

 

Inventories

 

All inventories are stated at the lower of cost, or market value, with cost determined using the last-in, first-out (LIFO) method.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost, less allowances for depreciation. Provision for depreciation has been computed at annual rates using straight-line or declining balance depreciation methods that will amortize the cost of the depreciable assets over their estimated useful lives.

 

Leases

Leases are classified as either finance leases or operating leases based on criteria in Topic 842. All of our current leases are classified as operating leases. We do not currently have finance leases but could in the future.

Operating lease right-of-use ("ROU") assets and liabilities are recognized on the adoption date based on the present value of lease payments over the remaining lease term. As interest rates are not explicitly stated or implicit in any of our leases, we utilized our incremental borrowing rate at the adoption date of February 4, 2019. For leases without explicitly stated or implicit interest rates that commenced after the adoption date, we use our incremental borrowing rate which was one-month LIBOR at the lease commencement date plus 1.5%. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

At the inception of a lease, we allocate the consideration in the contract to each lease and non-lease component based on the component's relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Some of our real estate leases contain variable lease payments, including payments based on the percentage increase in the Consumer Price Index for Urban Consumers (“CPI-U”). We used February 2019 CPI-U issued by the US Department of Labor’s Bureau of Labor Statistics to measure lease payments and calculate lease liabilities upon adoption of this standard. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred.

We have a sub-lease at one of our warehouses. In accordance with the provisions of Topic 842, since we have not been relieved as the primary obligor of the warehouse lease, we cannot net the sublease income against our lease payment to calculate the lease liability and ROU asset. Our practice has been, and we will continue to, straight-line the sub-lease income over the term of the sublease.

Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend the leases for up to seven years. We have elected not to recognize ROU assets and lease liabilities that arise from short term leases for any class of underlying asset. Short term leases are leases with lease terms of 12 months or less with either (a) no renewal option or (b) a renewal option which we are not reasonably certain to exercise.

Impairment of Long-Lived Assets

 

Long-lived assets, such as property, plant and equipment and definite-lived assets, are evaluated for impairment annually or more frequently when events or changes in circumstances indicate that the carrying amount of the assets or asset groups may not be recoverable through the estimated undiscounted future cash flows from the use of those assets. When any such impairment exists, the related assets are written down to fair value. Long-lived assets subject to disposal by sale are measured at the lower of their carrying amount or fair value less estimated cost to sell, are no longer depreciated, and are reported separately as “assets held for sale” in the consolidated balance sheets.

 

Intangible Assets and Goodwill

 

We own both definite-lived (amortizable) assets and indefinite-lived intangible assets. Our amortizable intangible assets are related to the Shenandoah and Home Meridian acquisitions and includes customer relationships and trademarks. Our indefinite lived assets include goodwill related to the Shenandoah and Home Meridian acquisitions, as well as the Bradington-Young and Sam Moore tradenames. We may acquire additional amortizable assets and/or indefinite lived intangible assets in the future. Our indefinite-lived intangible assets are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired.

 

Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include, but are not limited to:

 

a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy;

significant changes in demand for our products;

loss of key personnel; and

the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal.

 

The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize additional impairment on our intangible assets that may have a material-adverse effect on our results of operations and financial condition.

 

Cash Surrender Value of Life Insurance Policies

 

We own eighty78 life insurance policies on certain of our current and former executives and other key employees. These policies had a carrying value of $23.8$24.9 million at February 3, 20192, 2020 and have a face value of approximately $52$54 million as of that date. Proceeds from the policies are used to fund certain employee benefits and for other general corporate purposes. We account for life insurance as a component of employee benefits cost. Consequently, the cost of the coverage and any resulting gains or losses related to those insurance policies are recorded as a decrease or increase to operating income. Cash payments that increase the cash surrender value of these policies are classified as investing outflows on the Consolidated Statements of Cash Flows, with amounts paid in excess of the increase in cash surrender value included in operating activities. Gains on life insurance policies, which typically occur at the time a policy is redeemed, are included in the reconciliation of net income to net cash used in or provided by operating activities. Substantially all of the cash value of our company owned life insurance is pledged as collateral for our secured term loan.

 

Revenue Recognition

 

We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container.

 

The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period.

 

Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.

 

Cost of Sales

 

The major components of cost of sales are:

 

the cost of imported products purchased for resale;

raw materials and supplies used in our domestically manufactured products;

labor and overhead costs associated with our domestically manufactured products;

the cost of our foreign import operations;

charges associated with our inventory reserves;

warehousing and certain shipping and handling costs; and

all other costs required to be classified as cost of sales.

 

Selling and Administrative Expenses

 

The major components of our selling and administrative expenses are:

 

the cost of our marketing and merchandising efforts, including showroom expenses;

sales and design commissions;

the costs of administrative support functions including, executive management, information technology, human resources and finance; and

all other costs required to be classified as selling and administrative expenses.

 

Advertising

 

We offer advertising programs to qualified dealers under which we may provide signage, catalogs and other marketing support to our dealers and may reimburse some advertising and other costs incurred by our dealers in connection with promoting our products. The cost of these programs does not exceed the fair value of the benefit received. We charge the cost of point-of-purchase materials (including signage, catalogs, and fabric and leather swatches) to selling and administrative expense as incurred. Advertising costs charged to selling and administrative expense for fiscal years 2020, 2019 and 2018 and 2017 were $3.4 million, $3.3 million, $3.0 million, and $3.2$3.0 million, respectively. The costs for other advertising allowance programs are charged against net sales. We also have arrangements with some dealers to reimburse them for a portion of their advertising costs, which provides advertising benefits to us. Costs for these arrangements are expensed as incurred and are netted against net sales in our consolidated statements of income and comprehensive income.

 

Income Taxes

 

At times, tax law and generally accepted accounting principles differ in the treatment of certain income and expense items. These items may be excluded or included in taxable income at different times than is required for GAAP or “book” reporting purposes. These differences may be permanent or temporary in nature.

 

We determine our annual effective income tax rate based on pre-tax book income and permanent book and tax differences.

 

To the extent any book and tax differences are temporary in nature, that is, the book realization will occur in a different period than the tax realization, a deferred tax asset or liability is established. To the extent a deferred tax asset is created, we evaluate our ability to realize this asset. If we determine that we will not be able to fully utilize deferred tax assets, we establish a valuation reserve. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences reverse. All deferred tax assets and liabilities are classified as non-current on our consolidated balance sheets.

 

Earnings Per Share

 

We use the two-class method to compute basic earnings per share.  Under this method we allocate earnings to common shares and participating securities according to their participation rights in dividends declared and undistributed earnings and divide the income available to each class by the weighted average number of common shares for the period in each class.  Unvested restricted stock grants made to our non-employee directors and certain employees are considered participating securities because the shares have the right to receive non-forfeitable dividends.  Because the participating shares have no obligation to share in net losses, we do not allocate losses to our common shares in this calculation. 

 

Diluted earnings per share reflect the potential dilutive effect of securities that could share in our earnings.  Restricted stock awarded to non-employee directors and certain employees and restricted stock units granted to employees that have not yet vested are considered when computing diluted earnings per share.  We use the treasury stock method to determine the dilutive effect of both unvested restricted stock and unvested restricted stock units. Shares of unvested restricted stock and unvested restricted stock units under a stock-based compensation arrangement are considered options for purposes of computing diluted earnings per share and are considered outstanding shares as of the grant date for purposes of computing diluted earnings per share even though their exercise may be contingent upon vesting. Those stock-based awards are included in the diluted earnings per share computation even if the non-employee director may be required to forfeit the stock at some future date, or no shares may ever be issued to the employees. Unvested restricted stock and unvested restricted stock units are not included in outstanding common shares in computing basic earnings per share. 

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of: (i) assets and liabilities, including disclosures regarding contingent assets and liabilities at the dates of the financial statements; and (ii) revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include useful lives of fixed and intangible assets; allowance for doubtful accounts; deferred tax assets; the valuation of fixed assets and goodwill; our pension and supplemental retirement income plans; and stock-based compensation. These estimates and assumptions are based on our best judgments. We evaluate these estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust our estimates and assumptions as facts and circumstances dictate. Actual results could differ from our estimates.

 

NOTE 3- 3 – FISCAL YEAR

 

Our fiscal years end on the Sunday closest to January 31. In some years, generally once every six years, the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 2019 fiscal year that ended on February 3, 2019 was a 53-week fiscal year. Our quarterly periods are based on thirteen-week “reporting periods,” which end on Sundays. As a result, each quarterly period generally will be thirteen weeks, or 91 days long, except during a 53-week fiscal year which will have 14 weeks in the fourth quarter.

 

In the notes to the consolidated financial statements, references to the:

 

2020 fiscal year and comparable terminology mean the fiscal year that began February 4, 2019 and ended February 2, 2020;

2019 fiscal year and comparable terminology mean the fiscal year that began January 29, 2018 and ended February 3, 2019; and

2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and ended January 28, 2018; and

2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and ended January 29, 2017.2018.

 

NOTE 4-4 – ACQUISITIONSSHENANDOAH

Shenandoah AcquisitionACQUISITION

 

On September 29, 2017, we completed the previously announced acquisition (the “Shenandoah acquisition”) of substantially all of the assets of Shenandoah Furniture, Inc. (“SFI”) pursuant to the Asset Purchase Agreement the Company and SFI entered into on September 6, 2017 (the “Asset Purchase Agreement”). Upon completion and including post-closing working capital adjustments, the Company paid $32.8 million in cash (the “Cash Consideration”) and issued 176,018 shares of the Company’s common stock (the “Stock Consideration”) to the shareholders of SFI as consideration for the Shenandoah acquisition. The Cash Consideration included an additional payment of approximately $770,000 pursuant to working capital adjustments provided for in the Asset Purchase Agreement. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45). Under the Asset Purchase Agreement, we also assumed certain assets and liabilities of SFI. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of SFI.

 

Also on September 29, 2017, we entered into a second amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the Shenandoah acquisition. The Loan Agreement amends and restates the amended and restated loan agreement the Company entered into with BofA on February 1, 2016, in connection with its acquisition of substantially all of the assets of Home Meridian International, Inc. The Amended and Restated Loan Agreement provides us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan in connection with the completion of the Shenandoah acquisition. For additional details regarding the Loan Agreement, see Note 12.13. “Long-Term Debt,” below.

 

In accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Shenandoah acquisition has been accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from SFI at their respective fair values at the date of completion of the acquisition.  The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

 

The following table summarizes the estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Shenandoah acquisition as of September 29, 2017.

 

Purchase price consideration

    

     Cash paid for assets acquired, including working capital adjustment

 $32,773 

     Value of shares issued for assets acquired

  8,000 

     Fair value adjustment to shares issued for assets acquired*

  396 

Total purchase price

 $41,169 
     

Fair value estimates of assets acquired and liabilities assumed

 

   Accounts receivable

 $3,576 

   Inventory

  2,380 

   Prepaid expenses and other current assets

  52 

   Property and equipment

  5,401 

   Intangible assets

  14,300 

   Goodwill

  16,871 

   Accounts payable

  (699)

   Accrued expenses

  (712)

Total purchase price

 $41,169 

 

*As provided by the Asset Purchase Agreement, we calculated the number of common shares issued to SFI by dividing $8 million by the mean closing price of our common stock for the ten trading days immediately preceding the business day immediately preceding the closing date ($45.45). However, U.S. Generally Accepted Accounting Standards provide that we value stock consideration exchanged in the Shenandoah acquisition at fair value. Consequently, we adjusted the purchase price by $396,000, which represents the difference in the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45) and the price on September 29, 2017, multiplied by the number of common shares issued (176,018.) No additional consideration was transferred to SFI as a result of this adjustment.

 

During the fiscal 2018 fourth quarter, we paid $123,000 cash for the post-closing working capital adjustment which increased the purchase price by that same amount. Additionally, we (i) refined our estimates of the values of certain intangible assets which increased intangible assets by $1.1 million, (ii) recorded additional accrued expenses of $123,000 and (iii) decreased property and equipment by $17,000. These adjustments decreased goodwill by $774,000.

 

Property and equipment were recorded at fair value and primarily consist of machinery and equipment and leasehold improvements. Property and equipment will be amortized over their estimated useful lives and leasehold improvements will be amortized over the lesser of their useful lives or the remaining lease period.

 

Goodwill is calculated as the excess of the purchase price over the fair value net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. All goodwill is expected to be deductible for income tax purposes.

 

Intangible assets other than goodwill, consist of three separately identified assets:

 

Shenandoah customer relationships, which are definite-lived intangible assets with an aggregate fair value of $13.2 million. The customer relationships are amortizable and will be amortized over a period of thirteen years;

 

The Shenandoah tradename, which is definite-lived intangible assets with an aggregate fair value of $700,000. The trade name is amortizable and will be amortized over a period of twenty years; and

 

Shenandoah’s order backlog which is a definite-lived intangible asset with an aggregate fair value of $400,000 that we amortized over four months, with all of the expense recognized in fiscal year 2018.

 

The total weighted average amortization period for these assets is 12.1 years.

 

The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the Shenandoah acquisition as if it had occurred on February 1, 2016:

  

Pro Forma - Unaudited

 
  

13 Weeks Ended

  

52 Weeks Ended

 
  

January 29, 2017

  

January 29, 2017

 
  

(Pro forma)

  

(Pro forma)

 

Net Sales

 $184,013  $619,569 

Net Income

 $11,702  $27,896 

Basic EPS

 $1.00  $2.38 

Diluted EPS

 $1.00  $2.38 

 

  

Pro Forma - Unaudited

 
  

13 Weeks Ended

  

52 Weeks Ended

 
  

January 28, 2018

  

January 28, 2018

 
  

(Pro forma)

  

(Pro forma)

 

Net Sales

 $175,365  $649,936 

Net Income

 $8,775  $32,977 

Basic EPS

 $0.75  $2.82 

Diluted EPS

 $0.75  $2.81 

 

The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Shenandoah acquisition had been completed on the date indicated, nor is it indicative of our future operating results.

 

Material adjustments, net of income tax,  included in the fiscal 2017 pro forma financial information in the table above consist of the amortization of intangible assets ($171,000 in the quarterly period and $943,000 in the annual period), addition of transaction related costs ($0 in the quarterly period and $520,000 in the annual period), interest on additional debt incurred as part of the acquisition ($46,000 in the quarterly period and $197,000 in the annual period), salary expense ($46,000 in the quarterly period and $185,000 in the annual period), and income tax on Shenandoah operations ($536,000 in the quarterly period and $2.4 million in the annual period).

 

Material adjustments, net of income tax, included in the fiscal 2018 pro forma financial information in the table above consist of the amortization of intangible assets (decrease of $132,000 in the quarterly period and a net increase of $191,000 in the annual period), reclassification of transaction related costs to fiscal 2017 (-$67,000 in the quarterly period and -$522,000 in the annual period), interest on additional debt incurred as part of the acquisition (-$13,000 in the quarterly period and $61,000 in the annual period), salaries ($0 in the quarterly period and $123,000 in the annual period), and income tax on Shenandoah operations ($0 in the quarterly period and $2.4 million in the annual period).

 

The unaudited pro forma results do not reflect events that either have occurred or may occur in the future. They also do not give effect to certain charges that we expect to incur in connection with the Shenandoah acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization.

 

We incurred approximately $800,000 in Shenandoah acquisition-related costs in fiscal 2018. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income. Included in our fiscal 2018 results are Shenandoah’s October 2017 through January 2018 results, which include $11.3 million in net sales and $604,000 of operating income, including $750,000 in intangible amortization expense.

 

HMI Acquisition

On February 1, 2016, (the “Closing Date”) we completed the previously announced acquisition (the “acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“HMI”) pursuant to the Asset Purchase Agreement into which we and HMI entered on January NOTE 5 2016 (the “Asset Purchase Agreement”). Upon completion and including post-closing working capital adjustments, we paid $86 million in cash and issued 716,910 shares of our common stock (the “Stock Consideration”) to designees of HMI as consideration for the acquisition. The Stock Consideration consisted of (i) 530,598 shares due to the $15 million of consideration payable in shares of our common stock under the Asset Purchase Agreement, and (ii) 186,312 shares issued pursuant to working capital adjustments detailed in the Asset Purchase Agreement. The working capital adjustment was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of calendar 2015. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of our common stock for the fifteen trading days immediately preceding the Closing Date ($28.27). Under the Asset Purchase Agreement, we also assumed certain liabilities of HMI, including approximately $7.8 million of liabilities related to certain retirement plans. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of HMI.

In accordance with FASB Accounting Standards Codification 805, Business Combinations, the acquisition was accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from HMI at their respective fair values at the date of completion of the Acquisition.  Any excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

The following table summarizes our final estimates of the fair values of the identifiable assets acquired and liabilities assumed in the acquisition as of January 29, 2017. Adjustments recorded to our preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of February 1, 2016 were due to (i) the continued refinement of management's estimates, (ii) changes in pre-acquisition account balances due to the timing of HMI’s final financial close and (iii) adjustments made to conform the newly acquired entity’s accounting policies to our own. These adjustments included the reclassification of accounts receivable-related reserve items from accrued expenses to accounts receivable, the write-off of deferred rent, the reduction of property and equipment and prepaid expenses for items that had been capitalized inconsistent with our capitalization policy and the recognition of accrued salaries and wages to recognize compensated absences.

  

(in thousands)

 

Purchase price consideration

    

     Cash paid for assets acquired, including working capital adjustment

 $86,062 

     Value of shares issued for assets acquired

  15,000 

     Value of shares issued for excess net working capital

  5,267 
     

Total purchase price

 $106,329 
     

Fair value estimates of assets acquired and liabilities assumed:

    

   Accounts receivable

 $42,463 

   Inventory

  37,606 

   Prepaid expenses and other current assets

  1,801 

   Property and equipment

  5,292 

   Intangible assets

  27,800 

   Goodwill

  23,187 

   Accounts payable

  (22,784

)

   Accrued expenses

  (316

)

   Pension plan liabilities and deferred compensation balances

  (8,720

)

     

Total purchase price

 $106,329 

Property and equipment were recorded at fair value and primarily consist of leasehold improvements and will be amortized over their estimated useful lives. Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. We expect that all of the goodwill will be deductible for income tax purposes. Intangible assets, net, consist of three separately identified assets:

Home Meridian tradenames of $11.6 million consisting of:

o

Indefinite-lived intangible assets with an aggregate fair value of $11.4 million. The tradenames are not subject to amortization, but will be evaluated annually and as circumstances dictate, for impairment; and

o

Definite-lived intangible assets with an aggregate fair value of $200,000, which we expect to amortize over an eight-year period.

Home Meridian customer relationships which are definite-lived intangible assets with an aggregate fair value of $14.4 million. The customer relationships are amortizable and will be amortized over a period of eleven years; and

Home Meridian order backlog which is a definite-lived intangible asset with an aggregate fair value of $1.8 million which we amortized over five months, with most of the expense recognized in the fiscal 2017 first quarter.

We also assumed the net liability for Home Meridian’s legacy pension plans of $8.7 million, which was based on an actuarial valuation performed on February 2, 2016. The market value of pension plan assets, primarily consisting of mutual funds, was $11.6 million on February 2, 2016. Components of net periodic benefit cost for these plans are based on annual actuarial valuations and are included in our condensed consolidated statements of income under selling and administrative expenses.

The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the acquisition as if it had occurred on February 1, 2015:

  

52 Weeks Ended

 

(in millions except per share data)

 

January 31, 2016

 
  

(Pro forma)

 

Net Sales

 $571,720 

Net Income

  22,831 

Basic EPS

  2.12 

Diluted EPS

  2.11 

The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of our future operating results.

Material non-recurring adjustments excluded from the pro forma financial information in the table above consist of amortization of intangible assets, elimination of transaction related costs and an adjustment of the interest rate on short and long-term debt to reflect the interest rates in our amended credit facility.

The unaudited pro forma results do not reflect events that either have occurred or may occur in the future. They also do not give effect to certain charges that we expect to incur in connection with the acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization.

We recorded acquisition related costs of $1.2 million in fiscal 2017. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income.

NOTE 5 - Casualty Loss

 

On May 18, 2018, the Martinsville/Henry County, Va. area experienced torrential rains. Two of our Hooker Brands segment warehouse facilities were damaged as a result. No employees were injured, and the casualty loss caused only a nominal disruption in our ability to fulfill and ship orders. The costs associated with the recovery efforts exceeded our insurance deductible of $500,000. Consequently, we recorded a $500,000 casualty loss during the fiscal 2019 second quarter. We incurred another $409,000 of repair and remediation-related expenses during the third quarter, which was recovered from our casualty insurer during the fourth quarter of fiscal 2019.

 

NOTE 6DOUBTFUL ACCOUNTS AND OTHER ACCOUNTS RECEIVABLE ALLOWANCES

 

The activity in the allowance for doubtful accounts was:

 

 

Fifty-Three

 

Fifty-Two

 

Fifty-Two

 

 

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 

 

February 3,

 

January 28,

 

January 29,

 

 

February 2,

  

February 3,

  

January 28,

 

 

2019

 

2018

 

2017

 

 

2020

  

2019

  

2018

 

Balance at beginning of year

 

$

1,014

 

$

508

 

$

396

 

 $908  $1,014  $508 

Non-cash charges to cost and expenses

 

 

158

 

767

 

823

 

  417   158   767 

Less uncollectible receivables written off, net of recoveries

 

 

(264

)

 

 

(261

)

 

 

(711

)

  (422)  (264)  (261)

Balance at end of year

 

$

908

 

$

1,014

 

$

508

 

 $903  $908  $1,014 

 

The activity in other accounts receivable allowances was:

 

 

Fifty-Three

 

Fifty-Two

 

Fifty-Two

 

 

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 

 

Weeks Ended

 

Weeks Ended

 

Weeks Ended

 

 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 

 

February 3,

 

January 28,

 

January 29,

 

 

February 2,

  

February 3,

  

January 28,

 

 

2019

 

2018

 

2017

 

 

2020

  

2019

  

2018

 

Balance at beginning of year

 

$

5,117

 

$

6,298

 

$

636

 

 $4,267  $5,117  $6,298 

Non-cash charges to cost and expenses

 

 

(957

)

 

(1,272

)

 

5,586

 

Charges to cost and expenses

  31,815   41,606

)

  30,447

)

Less uncollectible receivables written off, net of recoveries

 

 

107

 

 

91

 

 

76

 

  (32,589)  (42,456)  (31,628)

Balance at end of year

 

$

4,267

 

$

5,117

 

$

6,298

 

 $3,493  $4,267  $5,117 

 

NOTE 7 – ACCOUNTS RECEIVABLE

 

 

February 3,

  

January 28,

 
 

2019

  

2018

  

February 2,

  

February 3,

 
         

2020

  

2019

 

Trade accounts receivable

 $117,732  $98,934  $91,261  $117,732 

Receivable from factor

  788   - 

Other accounts receivable allowances

  (4,267

)

  (5,117

)

  (3,493)  (4,267)

Allowance for doubtful accounts

  (908

)

  (1,014

)

  (903)  (908)

Accounts receivable

 $112,557  $92,803  $87,653  $112,557 

 

“Receivable from factor” represented amounts due with respect to factored accounts receivable for a single customer. The agreement was discontinued in early fiscal 2021.

NOTE 8 – INVENTORIES

 

 

February 3,

  

January 28,

  

February 2,

  

February 3,

 
 

2019

  

2018

  

2020

  

2019

 

Finished furniture

 $112,847  $92,502  $106,495  $112,847 

Furniture in process

  1,825   1,440   1,304   1,825 

Materials and supplies

  10,896   8,780   8,479   10,896 

Inventories at FIFO

  125,568   102,722   116,278   125,568 

Reduction to LIFO basis

  (20,364

)

  (18,263

)

  (23,465)  (20,364)

Inventories

 $105,204  $84,459  $92,813  $105,204 

 

If the first-in, first-out (FIFO) method had been used in valuing all inventories, net income would have been $19.5 million in fiscal 2020, $41.5 million in fiscal 2019, and $28.1 million in fiscal 2018, and $24.2 million in fiscal 2017.2018. We recorded LIFO expense of $3.1 million in fiscal 2020, $2.1 million in fiscal 2019, and LIFO income of $225,000 in fiscal 2018 and $1.6 million in fiscal 2017.2018.

 

At February 2, 2020 and February 3, 2019, and January 28, 2018, we had $1.3 million$424,000 and $3.2$1.3 million, respectively, in consigned inventories, which are included in the “Finished furniture” line in the table above.

 

At February 2, 2020, we held $9.6 million in inventory outside of the United States, in China and in Vietnam. At February 3, 2019, we held $8.1 million in inventory outside of the United States, in China and in Vietnam. At January 28, 2018, we held $10.5 million in inventory outside of the United States, in China and in Vietnam.

 

NOTE 9 – PROPERTY, PLANT AND EQUIPMENT

 

 

Depreciable Lives

  

February 3,

  

January 28,

  

Depreciable Lives

  

February 2,

  

February 3,

 
 

(In years)

  

2019

  

2018

  

(In years)

  

2020

  

2019

 
                      

Buildings and land improvements

 15 - 30  $24,588  $24,298  15 - 30  $31,316  $24,588 

Computer software and hardware

 3 - 10   18,719   18,302  3 - 10   19,166   18,719 

Machinery and equipment

 10   8,934   8,586  10   9,271   8,934 

Leasehold improvements

 

Term of lease

   9,376   8,982  

Term of lease

   9,737   9,376 

Furniture and fixtures

 3 - 8   2,318   2,186  3 - 8   2,597   2,318 

Other

 5   665   612  5   651   665 

Total depreciable property at cost

Total depreciable property at cost

   64,600   62,966      72,738   64,600 

Less accumulated depreciation

     39,925   35,100      44,089   39,925 

Total depreciable property, net

     24,675   27,866      28,649   24,675 

Land

     1,067   1,067      1,077   1,067 

Construction-in-progress

     3,740   316      181   3,740 

Property, plant and equipment, net

Property, plant and equipment, net

  $29,482  $29,249     $29,907  $29,482 

 

Depreciation expense for fiscal 2020, 2019 and 2018 and 2017 were $4.7 million, $5.0 million and $4.5 million, and $4.7 million, respectively.

 

Capitalized Software Costs 

 

Certain costs incurred in connection with developing or obtaining computer software for internal use are capitalized. These costs are amortized over periods of ten years or less. Capitalized software is reported as a component of computer software and hardware above and on the property, plant, and equipment line of our consolidated balance sheets. The activity in capitalized software costs was:

 

 

Fifty-Three Weeks

  

Fifty-Two Weeks

  

Fifty-Two Weeks

  

Fifty-Two Weeks

  

Fifty-Three Weeks

  

Fifty-Two Weeks

 
 

Ended

  

Ended

  

Ended

  

Ended

  

Ended

  

Ended

 
 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 

Balance beginning of year

 $5,982  $6,510  $6,062  $5,123  $5,982  $6,510 

Additions

  373   630   1,495   286   373   630 

Amortization expense

  (1,227

)

  (1,151

)

  (973

)

  (1,132)  (1,227)  (1,151)

Disposals

  (5

)

  (7

)

  -   -   (5)  (7)

Adjustments

  -   -   (74

)

Balance end of year

 $5,123  $5,982  $6,510  $4,277  $5,123  $5,982 

 

NOTE 10 – INTANGIBLE ASSETS AND GOODWILL

 

Our goodwill, some trademarks and trade names have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired.

 

Our non-amortizable intangible assets consist of:

 

Goodwill and trademarks and tradenames related to the Home Meridian and Shenandoah acquisitions; and

Trademarks and tradenames related to the acquisitions of Bradington-Young (acquired in 2002), Sam Moore (acquired in 2007) and Home Meridian (acquired in 2016).

 

We review goodwill annually for impairment or more frequently if events or circumstances indicate that it might be impaired.

 

In accordance with ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, the goodwill impairment test consists of a two-step process, if necessary. However, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test outlined in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing the quantitative assessment. The quantitative assessment involves estimating the fair value of our goodwill using projected future cash flows that are discounted using a weighted average cost of capital analysis that reflects current market conditions. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the most critical of which are the potential future cash flows and an appropriate discount rate. In addition to our qualitative assessment, management performed a quantitative analysis on the Home Meridian reporting unit’s goodwill in the fiscal 2020 fourth quarter. Based on our qualitative assessment as described above,and quantitative analysis, we have concluded that our goodwill is not impaired as of February 3, 2019.2, 2020.

 

In conjunction with our evaluation of the cash flows generated by the Home Meridian, Bradington-Young and Sam Moore reporting units, we evaluated the carrying value of trademarks and trade names using the relief from royalty method, which values the trademark/trade name by estimating the savings achieved by ownership of the trademark/trade name when compared to licensing the mark/name from an independent owner. The inputs used in the trademark/trade name analyses are considered Level 3 fair value measurements.

 

Details of our non-amortizable intangible assets are as follows:

 

 

Segment

 

February 3,

  

January 28,

   

February 2,

  

February 3,

 

Non-amortizable Intangible Assets

Non-amortizable Intangible Assets

   

2019

  

2018

 

Segment

 

2020

  

2019

 

Goodwill

Goodwill

 

Home Meridian

 $23,187  $23,187 

Home Meridian

 $23,187  $23,187 

Goodwill

Goodwill

 

All Other

  16,871   16,871 

Domestic Upholstery

  16,871   16,871 

Total Goodwill

Total Goodwill

  40,058   40,058 

Total Goodwill

  40,058   40,058 
                  

Trademarks and trade names - Home Meridian

Trademarks and trade names - Home Meridian

Home Meridian

  11,400   11,400 

Home Meridian

  11,400   11,400 

Trademarks and trade names - Bradington-Young

Trademarks and trade names - Bradington-Young

All Other

  861   861 

Domestic Upholstery

  861   861 

Trademarks and trade names - Sam Moore

Trademarks and trade names - Sam Moore

All Other

  396   396 

Domestic Upholstery

  396   396 

Total Trademarks and trade names

Total Trademarks and trade names

 $12,657  $12,657 

Total Trademarks and trade names

 $12,657  $12,657 
                  

Total non-amortizable assets

Total non-amortizable assets

 $52,715  $52,715 

Total non-amortizable assets

 $52,715  $52,715 

 

The following table is a rollforward of goodwill for the 2019, 20182020 and 20172019 fiscal years:

 

Segment

 

January 29, 2017

  

Acquisition

  

January 28, 2018

  

Acquisition

  

February 3, 2019

  

February 2, 2020

  

February 3, 2019

 
                            

Home Meridian

 $23,187  $-  $23,187  $-  $23,187  $23,187  $23,187 

All Other

  -   16,871   16,871   -   16,871 

Domestic Upholstery

  16,871   16,871 
 $23,187  $16,871  $40,058  $-  $40,058  $40,058  $40,058 

 

Our amortizable intangible assets are recorded in the Home Meridian and in All Other.Domestic Upholstery segments. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

 

 

Amortizable Intangible Assets

  

Amortizable Intangible Assets

 
 

Customer

          

Customer

         
 

Relationships

  

Trademarks

  

Totals

  

Relationships

  

Trademarks

  

Totals

 
                        

Balance at January 28, 2018

 $24,644  $838  $25,482 

Balance at February 3, 2019

 $22,320  $778  $23,098 

Amortization

  (2,324

)

  (60

)

  (2,384

)

  (2,324)  (60)  (2,384)

Balance at February 3, 2019

 $22,320  $778  $23,098 

Balance at February 2, 2020

 $19,996  $718  $20,714 

 

The weighted-average amortization period for all amortizable intangible assets is 10.29.2 years. The weighted-average amortization period for customer relationships is 9.99.0 years and is 16.515.8 years for our trademarks.

 

The estimated amortization expense associated with our amortizable intangible assets is expected to be as follows:

 

Fiscal Year

 

Amount

  

Amount

      

2020

  2,384 

2021

  2,384  

             2,384

2022

  2,384  

             2,384

2023

  2,384  

             2,384

2024

  2,384  

             2,384

2025 and thereafter

  11,178 

2025

 

             2,359

2026 and thereafter

 

              8,819

 $23,098  

$ 20,714

 

Gross intangible assets and total accumulated amortization for each major class of intangible assets is as follows:

 

 

February 3, 2019

  

January 28, 2018

  

February 2, 2020

  

February 3, 2019

 
                

Goodwill

 $40,058  $40,058  $40,058  $40,058 
                

Trademarks and tradenames

  13,495   13,557   13,435   13,495 

Accumulated amortization

  (60

)

  (62

)

  (60)  (60)

Trademarks and tradenames, net

  13,435   13,495   13,375   13,435 
                

Customer relationships

  24,644   27,600   22,320   24,644 

Accumulated amortization

  (2,324

)

  (2,956

)

  (2,324)  (2,324)

Customer relationships, net

  22,320   24,644   19,996   22,320 
                
                

Total Goodwill and other intangible assets, net

 $75,813  $78,197  $73,429  $75,813 

 

NOTE 11 – FAIR VALUE MEASUREMENTS

 

Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

 

Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;

 

Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and

 

Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of February 2, 2020, and February 3, 2019, and January 28, 2018, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.

 

AsOn January 30, 2019, our Board of February 3, 2019,Directors voted to terminate the assets of the Home Meridian segment’s legacyPension Plan. We settled all Pension Plan (the “Plan”) were measured at fair value on a recurring basis based on Level 1 inputs. Pension plan assets, held in a trust account by the Plan’s trustee, primarily consist of bond funds. Duringobligations during the fiscal 20192020 third quarter we transferred $3 million towith the Pension Plan to reduce the underfunded balance and engaged in a “de-risking” strategy by moving Plan assets into fixed income securities, in order to reduce the volatilitypurchase of the Plan Assets. As of February 3, 2019, the funded statusannuities for this plan was $86,000 shown on the “Other assets” line of our condensed consolidated balance sheets.participants. See Note 13.14. Employee Benefit Plans for additional information about the Plan.

 

Our assets measured at fair value on a recurring basis at February 2, 2020 and February 3, 2019, were as follows

  

Fair value at February 2, 2020

  

Fair value at February 3, 2019

 

Description

 

Level 1

  

Level 2

  

Level 3

  

Total

  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(In thousands)

 

Assets measured at fair value

                                

Company-owned life insurance

 $-  $24,888  $-  $24,888  $-  $23,816  $-  $23,816 

Pension plan assets

  -   -   -   -   10,992   -   -   10,992 

NOTE 12 – LEASES

On February 4, 2019, we adopted Accounting Standards Codification Topic 842 Leases. Our lease assets are composed of real estate and January 28, 2018,equipment. Real estate leases consist primarily of warehouses, showrooms and offices, while equipment leases consist of vehicles, office and warehouse equipment. At the inception of a contract, we assess whether the contract is, or contains, a lease. Our assessment is based on: (a) whether there is an identified asset in the contract that is land or a depreciable asset – i.e. property, plant or equipment; (b) whether we have the right to control the use of the identified asset throughout the period of use, which may be different from the overall contract term; and (c) whether we have the right to direct the use of an identified asset if it can direct (and change) how and for what purpose the asset will be used throughout the period of use.

Leases are classified as either finance leases or operating leases based on criteria in Topic 842. All of our leases are classified as operating leases. We do not currently have finance leases but could in the future.

Operating lease right-of-use ("ROU") assets and liabilities are recognized on the adoption date based on the present value of lease payments over the remaining lease term. As interest rates are not explicitly stated or implicit in any of our leases, we utilized our incremental borrowing rate at the adoption date of February 4, 2019, which was one-month LIBOR plus 1.5%. For leases without explicitly stated or implicit interest rates that commenced after the adoption date, we used our incremental borrowing rate which was one-month LIBOR at the lease commencement date plus 1.5%. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

At the inception of a lease, we allocate the consideration in the contract to each lease and non-lease component based on the component's relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Some of our real estate leases contain variable lease payments, including payments based on the percentage increase in the Consumer Price Index for Urban Consumers (“CPI-U”). We used February 2019 CPI-U issued by the US Department of Labor’s Bureau of Labor Statistics to measure lease payments and calculate lease liabilities. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred and are not included in the calculation of our lease liabilities.

We have a sub-lease at one of our warehouses. In accordance with the provisions of Topic 842, since we have not been relieved as the primary obligor of the warehouse lease, we cannot net the sublease income against our lease payment to calculate the lease liability and ROU asset. Our practice has been, and we will continue to, straight-line the sub-lease income over the term of the sublease. We recognized $405,000 sub-lease income in fiscal 2020.

Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend the leases for up to seven years. We have elected not to recognize ROU assets and lease liabilities that arise from short term leases for any class of underlying asset. Short term leases are leases with lease terms of 12 months or less with either (a) no renewal option or (b) a renewal option which we are not reasonably certain to exercise.

We have elected to adopt a package of practical expedients provided under Topic 842 that allows us not to reassess: (a) whether expired or existing contracts contain a lease under the new definition of a lease; (b) lease classification of expired or existing leases; and (c) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.

The components of lease cost and supplemental cash flow information for leases in fiscal 2020 were:

  

Fifty-two Weeks Ended

 
  

February 2, 2020

 

Operating lease cost

 $8,408 

Variable lease cost

  153 

Short-term lease cost

  581 

Total operating lease cost

 $9,142 
     
     

Operating cash outflows

 $8,725 

The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of February 2, 2020 were:

  

February 2, 2020

 

Real estate

 $38,175 

Property and equipment

  1,337 

Total operating leases right-of-use assets

 $39,512 
     
     

Current portion of operating lease liabilities

 $6,307 

Long term operating lease liabilities

  33,794 

Total operating lease liabilities

 $40,101 

Weighted-average remaining lease term is 7.4 years. We used our incremental borrowing rate which is LIBOR plus 1.5% at the adoption date. The weighted-average discount rate is 3.99%.

The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheet at February 2, 2020:

  

Undiscounted Future

Operating Lease Payments

 

2020

 $7,805 

2021

  7,182 

2022

  5,588 

2023

  5,329 

2024

  5,280 

2025 and thereafter

  15,205 

Total lease payments

 $46,389 

Less: impact of discounting

  (6,288)

Present value of lease payments

 $40,101 

As of February 2, 2020, we did not have any additional material operating or finance leases that had not yet commenced.

Under ASC 840, future minimum lease payments as of February 3, 2019 were as follows:

 

  

Fair value at February 3, 2019

  

Fair value at January 28, 2018

 

Description

 

Level 1

  

Level 2

  

Level 3

  

Total

  

Level 1

  

Level 2

  

Level 3

  

Total

 
              

(In thousands)

             

Assets measured at fair value

                                

Company-owned life insurance 

 $-  $23,816  $-  $23,816  $-  $23,622  $-  $23,622 

Pension plan assets

  10,992   -   -   10,992   8,757   -   -   8,757 
  

Minimum Future Operating

Lease Payments

 

2019

 $7,778 

2020

  7,226 

2021

  5,320 

2022

  3,610 

2023

  2,412 

2024 and thereafter

  588 

Total minimum lease payments

 $26,934 

 

NOTE 12 13– LONG-TERM DEBT

 

We currently have one unsecured term loan and one secured term loan outstanding and a revolving credit facility. The term loans are related to the Home Meridian acquisition. A second unsecured term loan, used to partially fund the Shenandoah acquisition, was paid off during fiscal 2019. Details of our loan agreements and revolving credit facility are detailed below.

 

Original Loan Agreement

 

On February 1, 2016, we entered into an amended and restated loan agreement (the “Original Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the closing of the Home Meridian Acquisition. Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the Home Meridian Acquisition.

 

Details of the individual credit facilities provided for in the Original Loan Agreement are as follows:

 

Unsecured revolving credit facility. The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

 

Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and

 

Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amounts borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement.

 

New Loan Agreement

 

On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement:

 

amended and restated the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility (the “Existing Revolver”), Unsecured Term Loan, and Secured Term Loan all remain outstanding under the New Loan Agreement; and

 

provided us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). Amounts outstanding under the New Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must repay the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 or the expiration of the Existing Revolver, at, which time all amounts outstanding under the New Unsecured Term Loan will become due and payable. We may prepay the outstanding principal amount under the New Unsecured Term Loan,we subsequently paid off in full or in part, on any interest payment date without penalty. On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan to partially fund the cash consideration used in the Shenandoah acquisition.fiscal 2019.

 

The New Loan Agreement also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:

 

Maintain a ratio of funded debt to EBITDA not exceeding:

o

2.25:1.0 through August 31, 2019; and

o

2.00:1.00 thereafter.1.00;

A basic fixed charge coverage ratio of at least 1.25:1.00; and

Limit capital expenditures to no more than $15.0 million during any fiscal year beginning in fiscal 2020.

 

The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement.

 

We were in compliance with each of these financial covenants at February 3, 2019.2, 2020.

 

Principal payments dueThe full remaining principal amounts of $30.1 million on our term loans are as follows:

Fiscal Year

 

Amount

 
     

2020

  5,857 

2021

  29,651 
  $35,508 

due on February 1, 2021. We expect to refinance the balance of our term loans and any balance due under our revolving credit facility (currently $0) during fiscal 2021.

Given that our term loans have a floating rate of interest and our credit profile has not materially changed since the inception of the loans, the carrying amount of our term loans approximates their fair value at February 3, 2019. 

During fiscal 2019, we paid off the remaining amounts due under the New Unsecured Term Loan.2, 2020. 

 

As of February 3, 2019,2, 2020, we had an aggregate $27.7$25.7 million available under the Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $2.3$4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of February 3, 2019.2, 2020. There were no additional borrowings outstanding under the Existing Revolver as of February 3, 2019.2, 2020. 

 

NOTE 1314 – EMPLOYEE BENEFIT PLANS

 

Employee Savings Plans

 

We sponsor a tax-qualified 401(k) retirement plan covering substantially all employees. This plan assists employees in meeting their savings and retirement planning goals through employee salary deferrals and discretionary employer matching contributions. Our contributions to the plan amounted to $1.4 million in fiscal 2020, $1.3 million in fiscal 2019 and $974,000 in fiscal 2018, and $977,000 in fiscal 2017.2018.

 

We adopted ASU 2017-07 as of the beginning of our 2019 fiscal year on January 29, 2018. Components of net periodic benefit cost other than the service cost for the SRIP, SERP and the Pension Plan are included in the line item “Other income, net” in our condensed consolidated statements of income. Service cost is included in our condensed consolidated statements of income under “Selling and administrative expenses.” The adoption resulted in the reclassification of a $30,000 gain and $581,000 expense from Selling and administrative expenses to Other income, net in our fiscal 2018 and 2017 condensed consolidated statements of income.

 

Executive Benefits

 

Pension, SRIP and SERP Overview

 

We maintain threetwo “frozen” retirement plans, which are paying benefits and may include active employees among the participants but we do not expect to add participants to these plans in the future. The threetwo plans include:

 

a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation; and

 

the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives; and

the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.executives.

In January 2019, we terminated the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) settled all the obligations in fiscal 2020 which was also frozen and had been frozen since we acquired it in the Home Meridian acquisition.

 

SRIP and SERP

 

The SRIP provides monthly payments to participants or their designated beneficiaries based on a participant’s “final average monthly earnings” and “specified percentage” participation level as defined in the plan, subject to a vesting schedule that may vary for each participant. The benefit is payable for a 15-year period following the participant’s termination of employment due to retirement, disability or death. In addition, the monthly retirement benefit for each participant, regardless of age, becomes fully vested and the present value of that benefit is paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. The SRIP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the vested benefits to which participating employees are currently entitled but based on the employees’ expected dates of separation or retirement. No employees have been added to the plan since 2008 and we do not expect to add additional employees in the future, due to changes in our compensation philosophy, which emphasizes more performance-based compensation measures in total management compensation.

 

The SERP provides monthly payments to eight retirees or their designated beneficiaries based on a defined benefit formula as defined in the plan.  The benefit is payable for the life of the retiree with the following forms available as a reduced monthly benefit: Ten-year Certain and Life; 50% or 100% Joint and Survivor Annuity. The SERP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the benefits to which retired employees are currently entitled. No employees have been added to the plan since 2006 and we do not expect to add additional employees in the future.

 

 

Summarized SRIP and SERP information as of each fiscal year-end (the measurement date) is as follows:

 

 

SRIP (Supplemental Retirement Income Plan)

 

SERP (Supplemental Executive Retirement Plan)

  

SRIP (Supplemental Retirement Income Plan)

 
 

Fifty-Three

  

Fifty-Two

   

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

     
 

Weeks Ended

  

Weeks Ended

   

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

     
 

February 3,

  

January 28,

   

February 3,

  

January 28,

  

February 2,

  

February 3,

    
 

2019

  

2018

   

2019

  

2018

  

2020

  

2019

     

Change in benefit obligation:

                             

Beginning projected benefit obligation

 $9,365  $8,845   $2,008  $2,302  $9,622  $9,365     

Service cost

  326   302            104   326     

Interest cost

  341   345    70   83   351   341     

Benefits paid

  (511

)

  (520

)

   (185

)

  (216

)

  (537)  (511)    

Actuarial loss (gain)

  101   393    (88

)

  (160

)

Actuarial loss

  716   101     

Ending projected benefit obligation (funded status)

 $9,622  $9,365   $1,805  $2,008  $10,256  $9,622     
                             

Accumulated benefit obligation

 $9,182  $8,727   $1,805  $2,008  $10,131  $9,182     
                             

Discount rate used to value the ending benefit obligations:

  3.75

%

  3.75

%

   3.90

%

  3.64

%

  2.50%  3.75%    
                             

Amount recognized in the consolidated balance sheets:

                             

Current liabilities (Accrued salaries, wages and benefits line)

 $511  $511   $173  $188  $557  $511     

Non-current liabilities (Deferred compensation line*)

  9,111   8,854    1,632   1,820 

Non-current liabilities (Deferred compensation line)

  9,699   9,111     

Total

 $9,622  $9,365   $1,805  $2,008  $10,256  $9,622     

 

 

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
 

February 3,

  

January 28,

  

January 29,

  

3-Feb

  

January 28,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2019

  

2018

  

2020

  

2019

  

2018

 

Net periodic benefit cost

                                

Service cost

 $326  $302  $375  $-  $-  $104  $326  $302 

Interest cost

  341   345   341   70   83   351   341   345 

Net loss (gain)

  172   62   (72

)

  -   - 

Net loss

  149   172   62 

Net periodic benefit cost

 $839  $709  $644  $70  $83  $604  $839  $709 
                                
                    

Other changes recognized in accumulated other comprehensive income

                                

Net loss (gain) arising during period

  101   393   330   (88

)

  (160

)

Net loss arising during period

  716   101   393 

Amortizations:

                                

Gain (Loss)

  (172

)

  (62

)

  72   -   - 

Loss

  (149)  (172)  (62)

Total recognized in other comprehensive loss (income)

  (71

)

  331   402   (88

)

  (160

)

  567   (71)  331 
                                

Total recognized in net periodic benefit cost and

accumulated other comprehensive income

 $768  $1,040  $1,046  $(18

)

 $(77

)

Total recognized in net periodic benefit cost and

            

accumulated other comprehensive income

 $1,171  $768  $1,040 
                                

Assumptions used to determine net periodic benefit cost:

                                

Discount rate

  3.75

%

  4.00

%

  4.3

%

  3.64

%

  3.77

%

  3.75%  3.75%  4.00%

Increase in future compensation levels

  4.00

%

  4.00

%

  4.0

%

  N/A   N/A   4.00%  4.00%  4.00%
                    

 

Estimated Future Benefit Payments:

                                

Fiscal 2020

 $511          $173     

Fiscal 2021

  873           169      $556         

Fiscal 2022

  873           165       868         

Fiscal 2023

  873           160       868         

Fiscal 2024

  960           155       955         

Fiscal 2025 through fiscal 2029

  4,340           683     

Fiscal 2025

  955         

Fiscal 2026 through fiscal 2030

  4,202         

 

 

For the SRIP, the discount rate used to determine the fiscal 20192020 net periodic cost was 3.75% based on the Moody’s Composite Bond Rate as of January 31, 2018. The net periodic benefit cost recognized in other comprehensive income was due to a decreased discount rate from 4.25% at January 29, 2017 to 4.00% at January 28, 2018 as well as increase in projected bonus for executives.2019. The discount rate utilized in each period was the Annualized Moody’s Composite Bond Rate rounded to the nearest 0.25%. At February 2, 2020, combining the Mercer yield curve and the plan's expected benefit payments resulted in a rate of 2.50%. This rate was used to value the ending benefit obligations. Increasing the SRIP discount rate by 1% would decrease the projected benefit obligation at February 2, 2020 by approximately $695,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 2, 2020 by $780,000.

At February 2, 2020, the actuarial losses related to the SRIP amounted to $716,000, net of tax of $149,000. At February 3, 2019, the actuarial losses related to the SRIP amounted to $101,000, net of tax of $23,000. The estimated actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the 2021 fiscal year is $337,633. There is no expected prior service (cost) or credit amortization.

  

SERP (Supplemental Executive Retirement Plan)

 
  

Fifty-Two

  

Fifty-Three

     
  

Weeks Ended

  

Weeks Ended

     
  

February 2,

  

February 3,

     
  

2020

  

2019

     

Change in benefit obligation:

            

Beginning projected benefit obligation

 $1,805  $2,008     

      Service cost

  -   -     

      Interest cost

  67   70     

      Benefits paid

  (180)  (185)    

      Actuarial loss (gain)

  168   (88)    

Ending projected benefit obligation (funded status)

 $1,860  $1,805     
             

Accumulated benefit obligation

 $1,860  $1,805     
             

Discount rate used to value the ending benefit obligations:

  2.60%  3.90%    
             

Amount recognized in the consolidated balance sheets:

            

   Current liabilities (Accrued salaries, wages and benefits line)

 $172  $173     

   Non-current liabilities (Deferred compensation line)

  1,688   1,632     

      Total

 $1,860  $1,805     
             

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
  

February 2,

  

February 3,

  

January 28,

 
  

2020

  

2019

  

2018

 

Net periodic benefit cost

            

   Service cost

 $-  $-  $- 

   Interest cost

  67   70   83 

   Net gain

  (5)  -   - 

      Net periodic benefit cost

 $62  $70  $83 
             
             

Other changes recognized in accumulated other comprehensive income

         

   Net loss (gain) arising during period

  168   (88)  (160)

Amortizations:

            

   Gain (Loss)

  5   -   - 

Total recognized in other comprehensive loss (income)

  173   (88)  (160)
             

Total recognized in net periodic benefit cost and

            

      accumulated other comprehensive income

 $235  $(18) $(77)
             

Assumptions used to determine net periodic benefit cost:

            

Discount rate

  3.90%  3.64%  3.77%

Increase in future compensation levels

  N/A   N/A   N/A 

Estimated Future Benefit Payments:

            

Fiscal 2021

 $172         

Fiscal 2022

  168         

Fiscal 2023

  163         

Fiscal 2024

  158         

Fiscal 2025

  152         

Fiscal 2026 through fiscal 2030

  651         

 

For the SERP, the discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by our actuary, Aon Hewitt (“Aon”). This yield curve was constructed from the underlying bond price and yield data collected as of the Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate.

At February 3, 2019, the plan used 3.90% based on the Aon AA Above Median yield curve as of January 31, 2019. This rate was used to determine the fiscal 2020 net periodic cost. At February 2, 2020, combining the Aon AA Above Median yield curve and the plan's expected benefit payments created a rate of 2.60%. This rate was used to value the ending benefit obligations. Increasing the SRIPSERP discount rate by 1% would decrease the projected benefit obligation at February 3, 20192, 2020 by approximately $640,000.$130,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 3, 20192, 2020 by $715,000. Increasing the SERP discount rate by 1% would decrease the projected benefit obligation at February 3, 2019 by approximately $124,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 3, 2019 by $141,000$148,000.

 

At February 3, 2019,2, 2020, the actuarial lossesloss related to the SRIP amounted to $101,000, net of tax of $23,000. At January 28, 2018, the actuarial losses related to the SRIP amounted to $393,000, net of tax of $62,000. The estimated prior service (cost) credit and actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 2020 are $0 and $149,000, respectively.

SERP was $168,000. At February 3, 2019, the actuarial gain related to the SERP was $88,000. The estimated net transition (asset)/obligation, prior service (cost) credit and actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 2020 are immaterial.

 

The Pension Plan

No benefits have accrued under the Pension Plan since it was frozen in March 1995.

We contributed $110,000 in required contributions to the Pension Plan in the fiscal 2019 first quarter. During the fiscal 2019 third quarter, we transferred $3 million to the Pension Plan to reduce the underfunded balance and engaged in a “de-risking” strategy by moving Plan assets into fixed income securities, in order to reduce the volatility of the Plan Assets.

 

On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. We settled all Pension Plan terminationobligations during the third quarter of fiscal 2020 with the purchase of nonparticipating annuity contracts for plan participants. Consequently, we recognized a $520,000 settlement gain during the quarter, which is an eighteen to twenty-four-month process, that involves seeking certain approvals from bothrecorded in the IRS and PBGC. Once we receive the appropriate approvals, an insurance company will be selected to provide annuities for participants at“other income” line of our condensed consolidated statements of income. The $520,000 represented an amount equal to their current monthly pension benefit. Upon settlement of the pension liability, we will reclassify the related pension losses currently recorded in accumulated other comprehensive loss, toincome until the consolidated statements of operations.  We expect to record pension settlement expenses against earnings which could adversely affect our earnings. Additionally, there could be excess costs to terminate the plan.

As of February 3, 2019, current Pension Plan assets are invested in bond funds and are measured at fair value using Level 1 inputs, which are quoted prices in active markets.

The Pension Plan discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by Aon. This yield curveobligation was constructed from the underlying bond price and yield data collected as of the Pension Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate.

The vested benefit obligation for the Pension Plan is the actuarial present value of the vested benefits to which the employee is currently entitled, but based on the employee’s expected date of separation or retirement.

Increasing the Pension Plan discount rate by 1% would decrease the projected benefit obligation at February 3, 2019 by approximately $1.1 million. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 3, 2019 by $1.3 million.

The expected long-term rate of return on Pension Plan assets (“EROA”) is 3.8% as ofthe Plan’s most recent valuation date of February 3, 2019. We select the EROA to use based on input from Aon, our Pension Plan Investment Consultant and Actuary. Aon provides us with a statistical analysis of future expected returns based on the current investment policy target asset mix and Aon’s capital market assumptions. We then select the return from Aon’s reasonable range recommendation.settled upon plan termination.

 

Summarized Pension Plan information as of February 3, 20192, 2020 (the measurement date) is as follows:

 

Pulaski Furniture Pension Plan

Fifty-Two

Fifty-Three

Weeks Ended

Weeks Ended

February 2,

February 3,

2020

2019

Change in benefit obligation:

Beginning projected benefit obligation

$10,906$11,198

Acquisition

      Service cost

  

Fifty-Three

  

Fifty-Two

 
  

Weeks Ended

  

Weeks Ended

 
  

February 3,

  

January 28,

 
  

2019

  

2018

 

Change in benefit obligation:

        

Beginning projected benefit obligation

 $11,198  $17,380 

Acquisition

        

      Service cost

  -   - 

      Interest cost

  415   695 

      Benefits paid

  (708

)

  (1,187

)

     Settlement

  -   (5,923

)

      Actuarial loss

  1   233 

Ending projected benefit obligation

 $10,906  $11,198 
         

Change in Plan Assets:

        

      Beginning fair value of plan assets

 $8,757  $13,881 

      Actual return on plan assets

  23   2,325 

      Employer contributions

  3,110   511 

      Actual expenses paid

  (190

)

  (371

)

      Settlement

  -   (6,402

)

      Actual benefits paid

  (708

)

  (1,187

)

Ending fair value of plan assets

 $10,992  $8,757 
         

Funded Status of the Plan

 $86  $(2,441

)

         

Discount rate used to value the ending benefit obligations:

  3.80

%

  3.82

%

         

Amount recognized in the consolidated balance sheets:

        

   Current liabilities (Accrued salaries, wages and benefits line)

 $86  $- 

   Non-current liabilities (Deferred compensation line*)

  -   (2,441

)

Net Asset/(Liability)

 $86  $(2,441

)

         
--

      Interest cost

F-30

303415

      Benefits paid

(522)(708)

     Settlement

(12,557)-

      Actuarial loss

1,8701

Ending projected benefit obligation

$-$10,906

Change in Plan Assets:

      Beginning fair value of Contentsplan assets

$10,992$8,757

      Actual return on plan assets

  

Fifty-Three

  

Fifty-Two

 
  

Weeks Ended

  

Weeks Ended

 
  

February 3,

  

January 28,

 
  

2019

  

2018

 

Net periodic benefit cost

        

   Expected administrative expenses

 $280  $280 

   Interest cost

  415   695 

   Net loss (gain)

  (575

)

  (933

)

      Net periodic benefit cost

 $120  $42 

Settlement/Curtailment expense (Income)

      (562

)

Total net periodic benefit cost (Income)

 $120  $(520

)

         

Other changes recognized in other comprehensive income

        

   Net (gain) loss arising during period

  464   (590

)

Amortization:

        

   (Loss) gain

  -   562 

Total recognized in other comprehensive (income) loss

  464   (28

)

         

Total recognized in net periodic benefit cost and

      accumulated other comprehensive income

 $584  $(548

)

         

Assumptions used to determine net periodic benefit cost:

        

Discount rate

  3.82

%

  4.14

%

Increase in future compensation levels

  N/A   N/A 
1,96023

      Employer contributions

Estimated Future Benefit Payments:

        

Fiscal 2020

 $681     

Fiscal 2021

  681     

Fiscal 2022

  683     

Fiscal 2023

  674     

Fiscal 2024

  693     

Fiscal 2025 through Fiscal 2029

  3,461     
3443,110

      Actual expenses paid

Life Insurance

(217)(190)

      Settlement

(12,557)-

We also provide a life insurance program for certain executives.  The life insurance program provides death benefit protection for these executives during employment up to age 65. Coverage under the program declines when a participating executive attains age 60 and automatically terminates when the executive attains age 65 or terminates employment with us for any reason, other than death, whichever occurs first. The life insurance policies funding this program are owned by the Company with a specified portion      Actual benefits paid

(522)(708)

Ending fair value of plan assets

$-$10,992

Funded Status of the deathPlan

$-$86

Discount rate used to value the ending benefit obligations:

N/A3.80%

Amount recognized in the consolidated balance sheets:

   Current liabilities (Accrued salaries, wages and benefits payable under those policies endorsed to the insured executives’ designated beneficiaries.line)

$-$86

   Non-current liabilities (Deferred compensation line)

--

Net Asset/(Liability)

$-$86

 

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
  

February 2,

  

February 3,

  

January 28,

 
  

2020

  

2019

  

2018

 

Net periodic benefit cost

            

   Expected administrative expenses

 $105  $280  $280 

   Interest cost

  303   415   695 

   Net gain

  (305)  (575

)

  (933

)

      Net periodic benefit cost

 $103  $120  $42 

Settlement/Curtailment Income

  (193)  -   (562

)

Total net periodic benefit cost (Income)

 $(90) $120  $(520

)

             

Other changes recognized in other comprehensive income

            

   Net (gain) loss arising during period

  327   464   (590

)

Amortization:

            

   Gain

  193   -   562 

Total recognized in other comprehensive (income) loss

  520   464   (28

)

             

Total recognized in net periodic benefit cost and

      accumulated other comprehensive income

 $430  $584  $(548

)

             

Assumptions used to determine net periodic benefit cost:

            

Discount rate

  3.80%  3.82

%

  4.14

%

Increase in future compensation levels

  N/A   N/A   N/A 

Performance Grants

 

The Compensation Committee of our Board of Directors annually awards performance grants to certain senior executives under the Company’s Stock Incentive Plan. Payments under these awards are based on our achieving specified performance targets during a designated performance period. Generally, each executive must remain continuously employed with the Company through the end of the performance period. Typically, performance grants can be paid in cash, shares of the Company’s common stock, or both, at the discretion of the Compensation Committee at the time payment is made.

 

Outstanding performance grants are classified as liabilities since the (i) settlement amount for each grant is not known until after the applicable performance period is completed and (ii) settlement of the grants may be made in common stock, cash or a combination of both. The estimated cost of each grant is recorded as compensation expense over its performance period when it becomes probable that the applicable performance targets will be achieved. The expected cost of the performance grants is revalued each reporting period. As assumptions change regarding the expected achievement of performance targets, a cumulative adjustment is recorded and future compensation expense will increase or decrease based on the currently projected performance levels. If we determine that it is not probable that the minimum performance thresholds for outstanding performance grants will be met, no further compensation cost will be recognized and any previously recognized compensation cost will be reversed.

 

During fiscal 2016,2017, the Compensation Committee awarded performance grants for the 20172018 fiscal year. The 20162017 awards had a three-year performance period that ended on January 29, 2017.28, 2018. The performance criteria for these awards were met and were paid in April 2017.2018. During fiscal 2017,2018, fiscal 20182019 and fiscal 2019,2020, the Compensation Committee awarded performance grants that have three-year performance periods ending on January 28, 2018, February 3, 2019, and February 2, 2020 and January 31, 2021, respectively. The following amounts were accrued in our consolidated balance sheets as of the fiscal period-end dates indicated:

 

 

February 3,

  

January 28,

  

February 2,

  

February 3,

 
 

2019

  

2018

  

2020

  

2019

 

Performance grants

                

Fiscal 2016 grant (Current liabilities, Accrued wages, salaries and benefits)

 $-  $193 

Fiscal 2017 grant (Current liabilities, Accrued wages, salaries and benefits)

  621   186  $-  $621 

Fiscal 2018 grant (Non-current liabilities, Deferred compensation)

  468   274 

Fiscal 2019 grant (Non-current liabilities, Deferred compensation)

  268   - 

Fiscal 2018 grant (Current liabilities, Accrued wages, salaries and benefits)

  333   468 

Total performance grants accrued

 $1,357  $653  $333  $1,089 

 

NOTE 14 15 SHARE-BASED COMPENSATION

 

Our Stock Incentive Plan permits incentive awards of restricted stock, restricted stock units, stock appreciation rights and performance grants to key employees. A maximum of 750,000 shares of the Company’s common stock is authorized for issuance under the Stock Incentive Plan. The Stock Incentive Plan also provides for annual restricted stock awards to non-employee directors. We have issued restricted stock awards to our non-employee directors since January 2006 and certain other management employees since 2014.

 

We account for restricted stock awards as “non-vested equity shares” until the awards vest or are forfeited. Restricted stock awards to non-employee directors and certain other management employees vest if the director/employee remains on the board/employed through the specified vesting period for shares and may vest earlier upon certain events specified in the plan. For shares issued to non-employee directors during fiscal 2016 and after, there is a 12-month service period. The fair value of each share of restricted stock is the market price of our common shares on the grant date. The weighted average grant-date fair values of restricted stock awards issued during fiscal 2020 were $29.77, $29.21 and $19.87, during fiscal 2019 were $37.83 and $46.88, respectively, during fiscal 2018 were $31.45, $41.70 and $39.05, during fiscal year 2017 were $25.45 and $24.17, respectively.

 

The restricted stock awards outstanding as of February 3, 20192, 2020 had an aggregate grant-date fair value of $830,000,$1.2 million, after taking vested and forfeited restricted shares into account. As of February 3, 2019,2, 2020, we have recognized non-cash compensation expense of approximately $476,000$654,000 related to these non-vested awards and $1.4$1.9 million for awards that have vested. The remaining $354,000$563,000 of grant-date fair value for unvested restricted stock awards outstanding at February 3, 20192, 2020 will be recognized over the remaining vesting periods for these awards.

outstanding restricted shares increased due primarily to grants of restricted shares to a larger population of our non-executive employees as an incentive for retention and alignment of individual performance to our values.

 

For each restricted stock issuance, the following table summarizes restricted stock activity, including the weighted average issue price of those shares on the grant date, the fair value of each grant of restricted stock on the grant date, compensation expense recognized for the unvested shares of restricted stock for each grant and the remaining fair value of the unvested shares of restricted stock for each grant as of February 3, 2019:2, 2020:

 

 

Whole

  

Grant-Date

  

Aggregate

  

Compensation

  

Grant-Date

Fair Value

  

Whole

Number of

Shares

  

Grant-Date

Fair Value

Per Share

  

Aggregate

Grant-Date

Fair Value

  

Compensation

Expense

Recognized

  

Grant-Date Fair Value

Unrecognized At

February 2, 2020

 
 

Number of

  

Fair Value

  

Grant-Date

  

Expense

  

Unrecognized At

           
 

Shares

  

Per Share

  

Fair Value

  

Recognized

  

February 3, 2019

           

Previous Awards (vested)

             $1,425                  $1,901     
                                        

Restricted shares Issued on April 13, 2016

  4,872  $25.45  $129   93  $5 

Forfeited

  (1,175

)

      (31

)

        
                    

Restricted shares Issued on April 13, 2017

  4,572  $31.45   142   66   42   4,572   31.45   142   102   6 

Forfeited

  (1,058

)

      (34

)

          (1,058)      (34)        
                                        

Restricted shares Issued on May 7, 2018

  7,972  $37.83   301   75   226   7,972   37.83   301   156   111 

Forfeited

  (886)      (34)        
                                        

Restricted shares Issued on June 8, 2018

  6,887  $46.88   323   242   81 

Restricted shares Issued on April 17, 2019

  15,239   29.77   454   109   283 

Forfeited

  (2,058)      (62)        
                                        

Awards outstanding at February 3, 2019:

  22,070      $830  $476  $354 

Restricted shares Issued on May 8, 2019

  1,027   29.21   30   7   23 
                    

Restricted shares Issued on June 17, 2019

  21,138   19.87   420   280   140 
                    
                    

Awards outstanding at February 2, 2020:

  45,946      $1,217  $654  $563 

 

We have awarded time-based restricted stock units to certain senior executives since 2011. Each restricted stock unit, or “RSU”, entitles the executive to receive one share of the Company’s common stock if he remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of the Company’s common stock, cash or both, at the discretion of the Compensation Committee. The RSUs are accounted for as “non-vested stock grants.” Similar to the restricted stock grants issued to our non-employee directors, RSU compensation expense is recognized ratably over the applicable service period. However, unlike restricted stock grants, no shares are issued, or other payment made, until the end of the applicable service period (commonly referred to as “cliff vesting”) and grantees are not entitled to receive dividends on their RSUs during that time. The fair value of each RSU is the market price of a share of our common stock on the grant date, reduced by the present value of the dividends expected to be paid on a share of our common stock during the applicable service period, discounted at the appropriate risk-free rate.

The following table presents RSU activityactivities for the year ended February 3, 2019:2, 2020:

 

 

Whole

  

Grant-Date

  

Aggregate

  

Compensation

  

Grant-Date

Fair Value

  

Whole

Number of

Units

  

Grant-Date

Fair Value

Per Unit

  

Aggregate

Grant-Date

Fair Value

  

Compensation

Expense

Recognized

  

Grant-Date Fair Value

Unrecognized At

February 2, 2020

 
 

Number of

  

Fair Value

  

Grant-Date

  

Expense

  

Unrecognized At

           
 

Units

  

Per Unit

  

Fair Value

  

Recognized

  

February 3, 2019

           

Previous Awards (vested)

             $255                  $959     
                                        

RSUs Awarded on April 13, 2016

  7,622  $24.26  $185   156  $6 

Forfeited

  (3,143

)

      (23

)

        

RSUs Awarded on April 15, 2017

  6,257  $30.03   185   94   42   6,258  $30.03   185   129   4 

Forfeited

  (2,579

)

      (49

)

          (2,687)      (52)        
                    

RSUs Awarded on June 4, 2018

  6,032  $35.86   216   54   162   6,032  $35.86   216   125   69 

Forfeited

  (616)      (22)        
                                        

Awards outstanding at February 3, 2019:

  14,189      $514  $304  $210 

RSUs Awarded on April 17, 2019

  10,196  $28.01   286   78   168 

Forfeited

  (1,441)      (40)        
                    

Awards outstanding at February 2, 2020:

  17,742      $573  $332  $241 

We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. One target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. The payout or settlement of the PSUs will be made in shares of our common stock.

  

Whole

Number of

Units

  

Grant-Date

Fair Value

Per Unit

  

Aggregate

Grant-Date

Fair Value

  

Compensation

Expense

Recognized

  

Grant-Date Fair Value

Unrecognized At

February 2, 2020

 
           
           
                     

PSUs Awarded on June 4, 2018

  22,499  $35.86   807   538   229 

 Forfeited

  (893)      (40)        
                     

PSUs Awarded on April 17, 2019

  36,412  $29.77   1,084   361   642 

 Forfeited

  (2,700)      (81)        
                     

Awards outstanding at February 2, 2020:

  55,318      $1,770  $899  $871 

The number of RSUs and PSUs increased primarily due to the addition of three executive officers in the second quarter of fiscal 2019.

 

 

NOTE 1516 – EARNINGS PER SHARE

 

We refer you to the Earnings Per Share disclosure in Note 2-Summary of Significant Accounting Policies, above, for more detailed information concerning the calculation of earnings per share.

 

All stock awards are designed to encourage retention and to provide an incentive for increasing shareholder value. We have issued restricted stock awards to non-employee members of the board of directors since 2006 and to certain managementnon-executive employees since 2014 and2014. We have issued restricted stock units (RSUs)(“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. One target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. The payout or settlement of the PSUs will be made in shares of our common stock.

We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs and PSUs, net of forfeitures and vested shares, as of the fiscal year-endperiod-end dates indicated:

 

 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 
                        

Restricted shares

  22,070   15,777   25,682   45,946   22,070   15,777 

Restricted stock units

  14,189   19,397   20,462 

RSUs and PSUs

  73,060   14,189   19,397 
  36,259   35,174   46,144   119,006   36,259   35,174 

 

All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share. Unlike the restricted stock grants issued to our non-employee directors, the transfer of ownership of common shares issued under our RSUs, if any, occurs after the three-year vesting period; however, RSUs are also considered when computing diluted earnings per share.

The following table sets forth the computation of basic and diluted earnings per share:

 

 

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 
                        

Net income

 $39,873  $28,250  $25,287  $17,083  $39,873  $28,250 

Less: Dividends on unvested restricted shares

  11   10   11   25   11   10 

Net earnings allocated to unvested restricted stock

  68   50   56   60   68   50 

Earnings available for common shareholders

 $39,794  $28,190  $25,220  $16,998  $39,794  $28,190 
                        

Weighted average shares outstanding for basic earnings per share

  11,759   11,633   11,531   11,784   11,759   11,633 

Dilutive effect of unvested restricted stock awards

  24   30   32   54   24   30 

Weighted average shares outstanding for diluted earnings per share

  11,783   11,663   11,563   11,838   11,783   11,663 
                        

Basic earnings per share

 $3.38  $2.42  $2.19  $1.44  $3.38  $2.42 
                        

Diluted earnings per share

 $3.38  $2.42  $2.18  $1.44  $3.38  $2.42 

 

In fiscal year 2018, we issued 176,018 shares of common stock to the designees of SFI as partial consideration for the Shenandoah acquisition on September 29, 2017. We issued 716,910 shares of our common stock to designees of Home Meridian as partial consideration for the Home Meridian acquisition on the first day of fiscal 2017.

 

 

NOTE 1617INCOME TAXES

 

Our provision for income taxes was as follows for the periods indicated:

 

 

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 

Current expense

                        

Federal

 $10,537  $12,022  $14,470  $2,312  $10,537  $12,022 

Foreign

  118   85   86   255   118   85 

State

  2,247   1,390   1,471   334   2,247   1,390 

Total current expense

  12,902   13,497   16,027   2,901   12,902   13,497 
                        

Deferred taxes

                        

Federal

  (963

)

  4,038   (1,902

)

  1,645   (963)  4,038 

State

  (222

)

  (13)  (216)  298   (222)  (13)

Total deferred taxes

  (1,185

)

  4,025   (2,118

)

  1,943   (1,185)  4,025 

Income tax expense

 $11,717  $17,522  $13,909  $4,844  $11,717  $17,522 

 

Total tax expense for fiscal 2020 was $4.5 million, of which $4.8 million expense was allocated to continuing operations and $ 300,000 tax benefit was allocated to other comprehensive income. Total tax expense for fiscal 2019 was $11.6 million, of which $11.7 million expense was allocated to continuing operations and $73,000 tax benefit was allocated to other comprehensive income. Total tax expense for fiscal 2018 was $17.5 million, of which $17.5 million was allocated to continuing operations and $26,000 tax benefit was allocated to other comprehensive income. Total tax expense for fiscal 2017 was $14.1 million, of which $13.9 million was allocated to continuing operations and $204,000 expense was allocated to other comprehensive income.

 

The effective income tax rate differed from the federal statutory tax rate as follows for the periods indicated:

 

 

Fifty-Three

  

Fifty-Two

  

Fifty-Two

  

Fifty-Two

  

Fifty-Three

  

Fifty-Two

 
 

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

  

Weeks Ended

 
 

February 3,

  

January 28,

  

January 29,

  

February 2,

  

February 3,

  

January 28,

 
 

2019

  

2018

  

2017

  

2020

  

2019

  

2018

 
                        

Income taxes at statutory rate

  21.0

%

  33.9

%

  35.0

%

  21.0%  21.0%  33.9%

Increase (decrease) in tax rate resulting from:

                        

State taxes, net of federal benefit

  3.2   2.0   2.2   2.4   3.2   2.0 

Officer's life insurance

  -0.7   -0.6   -1.2   -1.1   -0.7   -0.6 

Captive Life Insurance

  0.0   0.0   -1.3 

Tax Cuts and Jobs Act of 2017

  0.0   4.0   0.0   0.0   0.0   4.0 

Change in Valuation allowance

  0.0   0.0   1.3 

Other

  -0.8   -1.0   -0.5   -0.2   -0.8   -1.0 

Effective income tax rate

  22.7

%

  38.3

%

  35.5

%

  22.1%  22.7%  38.3%

 

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for the period indicated were:

 

 

February 3,

  

January 28,

  

February 2,

  

February 3,

 
 

2019

  

2018

  

2020

  

2019

 

Assets

                

Deferred compensation

 $3,572  $3,226  $2,673  $3,572 

Allowance for bad debts

  1,236   1,437   1,050   1,236 

Employee benefits

  607   335 

Inventories

  882   -   600   882 

Capital loss carryover

  339   335   393   339 

Accrued liabilities

  338   448 

Deferred rent

  231   168 

Other

  1,120   692   431   169 

Total deferred tax assets

  7,149   5,690   6,323   7,149 

Valuation allowance

  (339

)

  (335

)

  (393)  (339)
  6,810   5,355   5,930   6,810 

Liabilities

                

Inventory

  -   315 

Intangible assets

  923   108   1,737   923 

Property, plant and equipment

  1,288   1,520   1,313   1,288 

Unrecognized pension actuarial losses

  77   148   -   77 

Total deferred tax liabilities

  2,288   2,091   3,050   2,288 

Net deferred tax assets

 $4,522  $3,264  $2,880  $4,522 

 

At February 2, 2020 and February 3, 2019 and January 28, 2018 our net deferred tax asset was $4.5$2.9 million and $3.3 million,$4.5, respectively. The increase in the valuation allowance of $4,000$54,000 was due to the change in deferred stateforeign tax rates.credit limitations. We expect to fully realize the benefit of the deferred tax assets, with the exception of the capital loss carry forward and foreign tax credit carry forward, in future periods when the amounts become deductible. The capital loss carry forwardcarry-forward is $1.4 million and expires in fiscal 2022. The foreign tax credit carry-forward is $54,000 and expires beginning in fiscal 2029.

 

Current accounting standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also addresses de-recognition, classification, interest and penalties, accounting in interim periods and disclosures.

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the fiscal years ended February 2, 2020 and February 3, 2019 and January 28, 2018 are as follows:

 

 

February 3,

  

January 28,

  

February 2,

  

February 3,

 
 

2019

  

2018

  

2020

  

2019

 
                

Balance, beginning of year

 $91  $248  $43  $91 

Increase related to prior year tax positions

  -   - 

Decrease related to prior year tax positions

  (48

)

  (157

)

  (39)  (48)

Increase related to current year tax positions

  -   - 

Balance, end of year

 $43  $91  $4  $43 

 

The net unrecognized tax benefits as of February 3, 2019,2, 2020 which, if recognized, would affect our effective tax rate are $38,000.$3,000. We expect that $39,000$4,000 of gross unrecognized tax benefits will decrease within the next year.

 

We have elected to classify interest and penalties recognized with respect to unrecognized tax benefits as income tax expense. Interest expense of $5,600$1,000 and $10,000$5,600 was accrued as of February 2, 2020 and February 3, 2019, and January 28, 2018, respectively.

 

Tax years ending February 1, 2016,January 29, 2017, through February 3, 20192, 2020 remain subject to examination by federal and state taxing authorities.

 

 

NOTE 1718 – SEGMENT INFORMATION

 

As a public entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:

 

better understand our performance;

better assess our prospects for future net cash flows; and

make more informed judgments about us as a whole.

 

We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.

 

We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2018,2020, we updated our reportable segments as follows: Hooker Upholstery was aggregated with Hooker Casegoods and reported as the Hooker Branded segment. The domesticDomestic upholstery operations of Shenandoah Furniture,producers Bradington-Young, Sam Moore and Bradington-YoungShenandoah Furniture were moved from All other and aggregated into thea new reportable segment called “Domestic Upholstery.” All Other segment with Company’snow consists of H Contract and Lifestyle Brands. Lifestyle Brands is a business andin its start-up phase targeted at the remains on the Company’s Homeware division, which was shuttered in fiscal year 2018.interior designer channel. The Hooker Branded and Home Meridian segment remainssegments were unchanged. Therefore, for financial reporting purposes, we are organized into twothree reportable segments and “All Other”, which includes the remainder of our businesses:

 

Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; 

Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; and

All OtherDomestic Upholstery, , which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore and Shenandoah Furniture,Furniture; and

All Other, consisting of H Contract and Homeware, two businessesLifestyle Brands, a new business started in 2013. Nonelate fiscal 2019. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

 

 

The following table presents segment information for the periods, and as of the dates, indicated:indicated. Prior-year information has been recast to reflect the changes in segments discussed above.

 

  

Fifty-Three Weeks Ended

      

Fifty-Two Weeks Ended

      

Fifty-Two Weeks Ended

     
  

February 3, 2019

      

January 28, 2018

      

January 29, 2017

     
      

% Net

      

% Net

      

% Net

 

Net Sales

     

Sales

      

Sales

      

Sales

 

   Hooker Branded

 $178,710   26.2

%

 $166,754   26.9

%

 $158,685   27.5

%

   Home Meridian

  387,825   56.7

%

  365,472   58.9

%

  344,635   59.7

%

   All other

  116,966   17.1

%

  88,406   14.2

%

  73,899   12.8

%

Consolidated

 $683,501   100.0

%

 $620,632   100.0

%

 $577,219   100.0

%

                         

Gross Profit

                        

   Hooker Branded

 $58,122   32.5

%

 $53,007   31.8

%

 $51,653   32.6

%

   Home Meridian

  62,850   16.2

%

  62,325   17.1

%

  57,289   16.6

%

   All other

  26,015   22.2

%

  19,485   22.0

%

  17,179   23.2

%

Consolidated

 $146,987   21.5

%

 $134,817   21.7

%

 $126,121   21.8

%

                         

Operating Income

                        

   Hooker Branded

 $25,269   14.1

%

 $22,139   13.3

%

 $20,472   12.9

%

   Home Meridian

  18,828   4.9

%

  17,828   4.9

%

  14,687   4.3

%

   All other

  8,578   7.3

%

  5,487   6.2

%

  4,642   6.3

%

Consolidated

 $52,675   7.7

%

 $45,454   7.3

%

 $39,801   6.9

%

                         

Capital Expenditures

                        

   Hooker Branded

 $843      $1,372      $1,193     

   Home Meridian

  534       1,098       280     

   All other

  3,837       696       981     

Consolidated

 $5,214      $3,166      $2,454     
                         

Depreciation

   & Amortization

                        

   Hooker Branded

 $1,979      $1,956      $2,214     

   Home Meridian

  2,407       2,716       4,704     

   All other

  3,056       1,975       1,082     

Consolidated

 $7,442      $6,647      $8,000     

  

As of February 3,

      

As of January 28,

             
  

2019

  

%Total

  

2018

  

%Total

         

Assets

     

Assets

      

Assets

         

   Hooker Branded

 $108,445   36.9

%

 $130,184   47.9

%

        

   Home Meridian

  144,277   49.1

%

  107,283   39.4

%

        

   All other

  41,181   14.0

%

  34,394   12.7

%

        

Consolidated Assets

 $293,903   100.0

%

 $271,861   100.0

%

        

Consolidated Goodwill and Intangibles

  75,813       78,197             

Total Consolidated Assets

 $369,716       350,058             

  

Fifty-Two Weeks Ended

      

Fifty-Three Weeks Ended

      

Fifty-Two

Weeks Ended

     
  

February 2, 2020

      

February 3, 2019

      

January 28, 2018

     
      

% Net

      

% Net

      

% Net

 

Net Sales

     

Sales

      

Sales

      

Sales

 

   Hooker Branded

 $161,990   26.4% $178,710   26.2% $166,754   26.9%

   Home Meridian

  340,630   55.8%  387,825   56.7%  365,472   58.9%

   Domestic Upholstery

  95,670   15.7%  106,580   15.6%  78,392   12.6%

   All Other

  12,534   2.1%  10,386   1.5%  10,014   1.6%

Consolidated

 $610,824   100% $683,501   100% $620,632   100%
                         

Gross Profit

                        

   Hooker Branded

 $51,462   31.8% $58,122   32.5% $53,007   31.8%

   Home Meridian

  36,936   10.8%  62,850   16.2%  62,325   17.1%

   Domestic Upholstery

  21,120   22.1%  22,503   21.1%  16,228   20.7%

   All Other

  4,440   35.4%  3,512   33.8%  3,257   32.5%

Consolidated

 $113,958   18.7% $146,987   21.5% $134,817   21.7%
                         

Operating Income

                        

   Hooker Branded

 $21,512   13.3% $25,269   14.1% $22,139   13.3%

   Home Meridian

  (7,169)  -2.1%  18,828   4.9%  17,828   4.9%

   Domestic Upholstery

  6,637   6.9%  7,607   7.1%  4,463   5.7%

   All Other

  1,727   13.8%  971   9.4%  1,024   10.2%

Consolidated

 $22,707   3.7% $52,675   7.7% $45,454   7.3%
                         

Capital Expenditures

                        

   Hooker Branded

 $690      $843      $1,372     

   Home Meridian

  496       534       1,098     

   Domestic Upholstery

  3,914       3,807       696     

   All Other

  29       30       -     

Consolidated

 $5,129      $5,214      $3,166     
                         

Depreciation

   & Amortization

                        

   Hooker Branded

 $1,930      $1,979      $1,956     

   Home Meridian

  2,218       2,407       2,716     

   Domestic Upholstery

  2,938       3,049       1,968     

   All Other

  14       7       7     

Consolidated

 $7,100      $7,442      $6,647     
                         

 

  

As of

February 2,

      

As of

February 3,

             
  

2020

  

%Total

  

2019

  

%Total

         

Assets

     

Assets

      

Assets

         

   Hooker Branded

 $144,112   45.0% $109,702   37.3%        

   Home Meridian

  138,313   43.2%  144,277   49.1%        

   Domestic Upholstery

  36,085   11.3%  38,467   13.1%        

   All Other

  1,769   0.6%  1,457   0.5%        

Consolidated Assets

 $320,279   100% $293,903   100%        

Consolidated Goodwill

and Intangibles

  73,429       75,813             

Total Consolidated Assets

 $393,708      $369,716             

 

Sales by product type are as follows:

 

 

Net Sales (in thousands)

  

Net Sales (in thousands)

 

Fiscal

  

Fiscal

 

2019

      

2018

      

2017

      

2020

      

2019

      

2018

     
                                                

Casegoods

 $417,677   61

%

 $404,808   65

%

 $391,347   68

%

 $397,192   65% $417,677   61% $404,808   65%

Upholstery

  265,824   39

%

  215,824   35

%

  185,872   32

%

  213,632   35%  265,824   39%  215,824   35%
 $683,501      $620,632      $577,219      $610,824      $683,501      $620,632     

 

No significant long-lived assets were held outside the United States at either February 2, 2020 or February 3, 2019 or January 28, 2018.2019. International customers accounted for 1.2%1.6% of consolidated invoiced sales in fiscal 2020, 1.2% fiscal 2019 2.5% fiscal 2018 and 2%2.5% of consolidated invoiced sales in fiscal 2017.2018. We define international sales as sales outside of the United States and Canada. 

 

NOTE 1819 – COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS

Legal contingencies

We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our condensed financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although we will make disclosures for material matters as required by ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter.

In the fiscal 2019 third quarter, we recorded a $4.0 million liability and related insurance proceeds receivable for a claim arising from a lawsuit in which we were named a defendant. The lawsuit stemmed from an auto-accident involving an independent contractor that had delivered products to one of our distribution facilities immediately prior to the accident. During the fiscal 2019 third quarter, the Company and its insurance carriers reached a $4.0 million settlement with the plaintiff and our insurance carriers reimbursed us for the full $4.0 million settlement amount. The lawsuit was dismissed by the court during the fiscal 2019 fourth quarter.

 

Commitments and Off-BalanceOff-Balance Sheet Arrangements

 

We lease office space, warehousing facilities, showroom space and office equipment under leases expiring over the next five years. Rent expense was $11.2 million in fiscal 2020, $10.1 million in fiscal 2019, and $9.0 million in fiscal 2018, and $7.7 million in fiscal 2017.2018. Future minimum annual commitments under leases and operating agreements are $7.8 million in fiscal 2020, $7.2$8.7 million in fiscal 2021, $5.3$8.2 million in fiscal 2022, and $3.6$6.6 million in fiscal 2023.2023, $6.4 million in fiscal 2024 and $6.4 million in fiscal 2025.

 

We had letters of credit outstanding totaling $2.3$4.3 million on February 3, 2019.2, 2020. We utilize letters of credit to collateralize certain imported inventory purchases and certain insurance arrangements.

 

Substantially all of the cash value of our company owned life insurance is pledged as collateral for our secured term loan.

 

In the ordinary course of our business, we may become involved in legal proceedings involving contractual and employment relationships, product liability claims, intellectual property rights and a variety of other matters. We do not believe that any pending legal proceedings will have a material impact on our financial position or results of operations.

 

Our business is subject to a number of significant risks and uncertainties, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects.

 

NOTE 1920 – CONCENTRATIONS OFRISK

 

Imported Products SourcingSourcing

 

We source imported products through multiple vendors, located in eight countries. Because of the large number and diverse nature of the foreign factories from which we can source our imported products, we have some flexibility in the placement of products in any particular factory or country.

 

Factories located in Vietnam and China are a critical resource for Hooker Furniture. In fiscal 2019,2020, imported products sourced from Vietnam and China accounted for nearly all of our import purchases and our top five suppliers in those countries accounted for approximately half of our fiscal 20192020 import purchases. A disruption in our supply chain from Vietnam or China could significantly impact our ability to fill customer orders for products manufactured at that factory or in that country.

 

Raw Materials Sourcing for Domestic Upholstery Manufacturing

 

Our five largest domestic upholstery suppliers accounted for approximately 28% of our raw materials supply purchases for domestic upholstered furniture manufacturing operations in fiscal 2019.2020. One supplier accounted for 7.5%8.1% of our raw material purchases in fiscal 2019.2020. Should disruptions with these suppliers occur, we believe we could successfully source these products from other suppliers without significant disruption to our operations.

 

Concentration of Sales and Accounts Receivable

 

NoOne customer accounted for more than 10%nearly 11% of our consolidated sales in fiscal 2019.2020. Our top five customers accounted for nearly one-thirdapproximately 30% of our fiscal 20192020 consolidated sales. The loss of any one or more of these customers could adversely affect our earnings, financial condition and liquidity. At February 3, 2019, nearly half2, 2020, 35% of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity.

 

NOTE 2021CONSOLIDATED QUARTERLY DATA (Unaudited-(Unaudited- see accompanying accountant’s report.)

 

 

Fiscal Quarter

  

Fiscal Quarter

 
 

First

  

Second

  

Third

  

Fourth

  

First

  

Second

  

Third

  

Fourth

 

2019

                

2020

                

Net sales

 $142,892  $168,661  $171,474  $200,475  $135,518  $152,248  $158,176  $164,882 

Cost of sales

  110,926   133,016   135,638   156,935   110,001   123,422   129,777   133,665 

Gross profit

  31,966   35,645   35,836   43,540   25,517   28,826   28,399   31,217 

Selling and administrative expenses

  21,990   23,184   22,979   23,777   22,016   22,462   22,810   21,581 

Net income

  7,154   8,693   9,332   14,691   1,987   4,160   3,920   7,016 

Basic earnings per share

 $0.61  $0.74  $0.79  $1.25  $0.17  $0.35  $0.33  $0.59 

Diluted earnings per share

 $0.61  $0.74  $0.79  $1.24  $0.17  $0.35  $0.33  $0.59 

 

2018

                

2019

                

Net sales

 $130,872  $156,308  $157,934  $175,518  $142,892  $168,661  $171,474  $200,475 

Cost of sales

  102,729   123,191   123,656   136,239   110,926   133,016   135,638   156,935 

Gross profit

  28,143   33,117   34,278   39,279   31,966   35,645   35,836   43,540 

Selling and administrative expenses

  20,570   20,858   22,318   23,533   21,990   23,184   22,979   23,777 

Net income

  4,746   7,778   7,202   8,524   7,154   8,693   9,332   14,691 

Basic earnings per share

 $0.41  $0.67  $0.62  $0.72  $0.61  $0.74  $0.79  $1.25 

Diluted earnings per share

 $0.41  $0.67  $0.61  $0.72  $0.61  $0.74  $0.79  $1.24 

 

Earnings per share for each fiscal quarter is derived using the weighted average number of shares outstanding during that quarter. Earnings per share for each fiscal year is derived using the weighted average number of shares outstanding on an annual basis. Consequently, the sum of earnings per share for the quarters of a fiscal year may not equal earnings per share for the full fiscal year.

 

NOTE 21-22 – RELATED PARTY TRANSACTIONS

 

We lease the four properties utilized in Shenandoah’s operations. One of our employees has an ownership interest in the entities that own these properties. The leases commenced on September 29, 2017 and an option to renew each for an additional seven years. All four leases include annual rent escalation clauses with respect to minimum lease payments after the initial 84-month term of the lease is completed. In addition to monthly lease payments, we also incur expenses for property taxes, routine repairs and maintenance and other operating expenses.  We paid $821,000 in lease payments to these entities during fiscal 2019.2020.

 

NOTE 22-23 – SUBSEQUENT EVENTS

 

Cash Dividend

 

On March 3, 2019,2, 2020, our Board of Directors declared a quarterly cash dividend of $0.15$0.16 per share, payable on March 29, 201931, 2020 to shareholders of record at March 18, 2019.17, 2020.

 

COVID-19

 

In late 2019, an outbreak of COVID-19 was identified and has subsequently been recognized as a global pandemic by the World Health Organization. Federal, state and local governments in the U.S and elsewhere have imposed restrictions on travel and business operations and are advising or requiring individuals to limit or eliminate time outside of their homes. Temporary closures of businesses have also been ordered in certain jurisdictions and other businesses have temporarily closed on a voluntarily basis. Consequently, the COVID-19 outbreak has severely restricted the level of economic activity in the U.S. and around the world.

Due to the aforementioned effects of COVID-19, we have seen decreased demand for home furnishings in our industry and for our company. We have also seen a spike in order cancellations over the last few weeks prior to filing this Annual Report, which has blunted some of the strong backlog we had at fiscal year-end. Some customers have taken or are expected to take extended payment terms and we expect cash collections to slow.

To begin to address the financial impact of the virus, we have delayed non-essential capital spending and have implemented other cost-cutting measures, including abbreviated shifts, furloughs, the temporary closure of our domestic manufacturing plants, staff reductions, temporary fee reductions for Board of Directors, temporary salary reductions for officers and other managers, rationalizing current import purchase orders and working with our vendors to cut costs and extend payment terms where we can.

We expect sales and earnings to be down materially in the fiscal 2021 first quarter and for fiscal 2021, both as compared to prior-year periods, but we are unable to reasonably estimate the extent of those decreases. Additionally, we note we have limited insight into the extent to which our business may be impacted by the COVID-19 pandemic and there are many unknowns including the severity and duration of the current crisis. Further delays in the receipt of goods and other unanticipated impacts to our supply chain, including on direct imports or goods purchased domestically, or our customers, could have a more significant impact on our future business (including sales and earnings).

We continue to monitor the situation closely and may implement further measures to provide additional financial flexibility as we work to protect our cash position and liquidity.

 

F-41