UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended November May 3, 20120920
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) | (IRS employer identification no.) |
440 East Commonwealth Boulevard, Martinsville, VA 24112
(Address of principal executive offices, zip code)zip code)
(276) 632-2133
(Registrant’s telephone number, including area code)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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.
Large accelerated Filer ☐ | Accelerated | |
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 Exchange Act). Yes ☐ No ☒
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 |
As of December 6, 2019,July 21, 2020, there were 11,838,36711,889,968 shares of the registrant’s common stock outstanding.
PART I. FINANCIAL INFORMATION |
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Item 1. |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 6. |
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EXPLANATORY NOTE
Reliance on SEC Relief from Filing Requirements
On March 25, 2020, the U.S. Securities and Exchange Commission (the “SEC”) issued an order under Section 36 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and certain rules thereunder (Release No. 34-88465) (the “Order”), which allows a registrant to delay the filing of certain reports under the Exchange Act by up to 45 days after the original due date of such report if a registrant is unable to meet the filing deadline due to circumstances related to the COVID-19 pandemic. The Order extends the deadlines for certain required filings under the Exchange Act, including Form 10-Q, by up to 45 days after the original filing deadline. Hooker Furniture Corporation (the “Company”) is relying on the Order and therefore delayed the filing of this Quarterly Report on Form 10-Q for the period ended May 3, 2020, which was originally due on June 12, 2020, due to circumstances related to the COVID-19 pandemic.
On June 12, 2020, the Company filed a Current Report on Form 8-K stating that the preparation of the Company’s Quarterly Report on Form 10-Q was delayed due to circumstances related to the COVID-19 pandemic. The adverse economic effects brought on by the COVID-19 pandemic, including reductions in the Company’s sales, earnings, and market value, as well as other changing market dynamics, triggered an interim impairment assessment and required the Company to perform a valuation of its intangible assets, such as goodwill and trade names. The Company required additional time to complete its analysis and valuation which it has now completed.
PART I. FINANCIAL INFORMATION
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(In thousands) |
As of | November 3, | February 3, | May 3, | February 2, | ||||||||||||
2019 | 2019 | 2020 | 2020 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 24,498 | $ | 11,435 | $ | 51,240 | $ | 36,031 | ||||||||
Trade accounts receivable, net | 92,603 | 112,557 | 63,852 | 87,653 | ||||||||||||
Inventories | 103,615 | 105,204 | 82,050 | 92,813 | ||||||||||||
Income tax recoverable | 2,348 | - | 1,618 | 751 | ||||||||||||
Prepaid expenses and other current assets | 4,119 | 5,735 | 5,545 | 4,719 | ||||||||||||
Total current assets | 227,183 | 234,931 | 204,305 | 221,967 | ||||||||||||
Property, plant and equipment, net | 30,782 | 29,482 | 29,256 | 29,907 | ||||||||||||
Cash surrender value of life insurance policies | 25,016 | 23,816 | 25,603 | 24,888 | ||||||||||||
Deferred taxes | 3,035 | 4,522 | 12,905 | 2,880 | ||||||||||||
Operating leases right-of-use assets | 40,872 | - | 37,786 | 39,512 | ||||||||||||
Intangible assets, net | 33,967 | 35,755 | 28,025 | 33,371 | ||||||||||||
Goodwill | 40,058 | 40,058 | 490 | 40,058 | ||||||||||||
Other assets | 1,528 | 1,152 | 1,112 | 1,125 | ||||||||||||
Total non-current assets | 175,258 | 134,785 | 135,177 | 171,741 | ||||||||||||
Total assets | $ | 402,441 | $ | 369,716 | $ | 339,482 | $ | 393,708 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Current portion of term loans | $ | 5,833 | $ | 5,829 | $ | 28,170 | $ | 5,834 | ||||||||
Trade accounts payable | 27,407 | 40,838 | 13,396 | 25,493 | ||||||||||||
Accrued salaries, wages and benefits | 5,449 | 8,002 | 3,271 | 4,933 | ||||||||||||
Income tax accrual | - | 3,159 | ||||||||||||||
Customer deposits | 13,030 | 3,023 | 4,024 | 3,351 | ||||||||||||
Current portion of lease liabilities | 6,395 | - | 6,162 | 6,307 | ||||||||||||
Other accrued expenses | 3,913 | 3,564 | 2,490 | 4,211 | ||||||||||||
Total current liabilities | 62,027 | 64,415 | 57,513 | 50,129 | ||||||||||||
Long term debt | 25,253 | 29,628 | - | 24,282 | ||||||||||||
Deferred compensation | 10,611 | 11,513 | 11,310 | 11,382 | ||||||||||||
Lease liabilities | 35,304 | - | 32,581 | 33,794 | ||||||||||||
Other long-term liabilities | 3 | 984 | ||||||||||||||
Total long-term liabilities | 71,171 | 42,125 | 43,891 | 69,458 | ||||||||||||
Total liabilities | 133,198 | 106,540 | 101,404 | 119,587 | ||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock, no par value, 20,000 shares authorized, 11,838 and 11,785 shares issued and outstanding on each date | 51,177 | 49,549 | ||||||||||||||
Common stock, no par value, 20,000 shares authorized, 11,871 and 11,838 shares issued and outstanding on each date | 52,187 | 51,582 | ||||||||||||||
Retained earnings | 218,131 | 213,380 | 186,540 | 223,252 | ||||||||||||
Accumulated other comprehensive (loss) income | (65 | ) | 247 | |||||||||||||
Accumulated other comprehensive loss | (649 | ) | (713 | ) | ||||||||||||
Total shareholders’ equity | 269,243 | 263,176 | 238,078 | 274,121 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 402,441 | $ | 369,716 | $ | 339,482 | $ | 393,708 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In thousands, except per share data)
(Unaudited)
For the | ||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||
Nov 3, | Oct 28, | Nov 3, | Oct 28, | May 3, | May 5, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Net sales | $ | 158,176 | $ | 171,474 | $ | 445,942 | $ | 483,026 | $ | 104,597 | $ | 135,518 | ||||||||||||
Cost of sales | 129,777 | 135,638 | 363,201 | 379,079 | 85,944 | 110,001 | ||||||||||||||||||
Casualty loss | - | - | - | 500 | ||||||||||||||||||||
Total Cost of sales | 129,777 | 135,638 | 363,201 | 379,579 | ||||||||||||||||||||
Gross profit | 28,399 | 35,836 | 82,741 | 103,447 | 18,653 | 25,517 | ||||||||||||||||||
Selling and administrative expenses | 22,810 | 22,979 | 67,286 | 68,150 | 19,177 | 22,016 | ||||||||||||||||||
Goodwill impairment charges | 39,568 | - | ||||||||||||||||||||||
Trade name impairment charges | 4,750 | - | ||||||||||||||||||||||
Intangible asset amortization | 596 | 596 | 1,788 | 1,788 | 596 | 596 | ||||||||||||||||||
Operating income | 4,993 | 12,261 | 13,667 | 33,509 | ||||||||||||||||||||
Operating (loss)/income | (45,438 | ) | 2,905 | |||||||||||||||||||||
Other income, net | 309 | 200 | 215 | 275 | ||||||||||||||||||||
Other expense, net | (42 | ) | (62 | ) | ||||||||||||||||||||
Interest expense, net | 316 | 354 | 986 | 1,099 | 208 | 341 | ||||||||||||||||||
Income before income taxes | 4,986 | 12,107 | 12,896 | 32,685 | ||||||||||||||||||||
(Loss)/income before income taxes | (45,688 | ) | 2,502 | |||||||||||||||||||||
Income tax expense | 1,066 | 2,775 | 2,829 | 7,504 | ||||||||||||||||||||
Income tax (benefit)/expense | (10,869 | ) | 515 | |||||||||||||||||||||
Net income | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||||||||||
Net (loss)/income | $ | (34,819 | ) | $ | 1,987 | |||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||
(Loss) / earnings per share | (Loss) / earnings per share | |||||||||||||||||||||||
Basic | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.14 | $ | (2.95 | ) | $ | 0.17 | |||||||||||
Diluted | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.13 | $ | (2.95 | ) | $ | 0.17 | |||||||||||
Weighted average shares outstanding: | Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | 11,789 | 11,763 | 11,782 | 11,758 | 11,798 | 11,769 | ||||||||||||||||||
Diluted | 11,816 | 11,778 | 11,821 | 11,778 | 11,798 | 11,805 | ||||||||||||||||||
Cash dividends declared per share | $ | 0.15 | $ | 0.14 | $ | 0.45 | $ | 0.42 | $ | 0.16 | $ | 0.15 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME |
(In thousands) |
(Unaudited) |
For the | ||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net Income | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Gain on pension plan settlement | (520 | ) | - | (520 | ) | - | ||||||||||
Income tax effect on settlement | 124 | - | 124 | - | ||||||||||||
Amortization of actuarial loss | 37 | 43 | 111 | 129 | ||||||||||||
Income tax effect on amortization | (9 | ) | (10 | ) | (27 | ) | (31 | ) | ||||||||
Adjustments to net periodic benefit cost | (368 | ) | 33 | (312 | ) | 98 | ||||||||||
Reclassification of tax effects due to the adoption of ASU 2018-02 | - | - | - | 111 | ||||||||||||
Total Comprehensive Income | $ | 3,552 | $ | 9,365 | $ | 9,755 | $ | 25,390 |
Thirteen Weeks Ended | ||||||||
May 3, | May 5, | |||||||
2020 | 2019 | |||||||
Net (loss)/Income | $ | (34,819 | ) | $ | 1,987 | |||
Other comprehensive income (loss): | ||||||||
Amortization of actuarial loss | 84 | 37 | ||||||
Income tax effect on amortization | (20 | ) | (9 | ) | ||||
Adjustments to net periodic benefit cost | 64 | 28 | ||||||
Total Comprehensive (Loss)/Income | $ | (34,755 | ) | $ | 2,015 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the | For the | |||||||||||||||
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Nov 3, | Oct 28, | May 3, | May 5, | |||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Operating Activities: | Operating Activities: | |||||||||||||||
Net income | $ | 10,067 | $ | 25,181 | ||||||||||||
Net (loss)/income | $ | (34,819 | ) | $ | 1,987 | |||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
Goodwill and intangible asset impairment charges | 44,318 | - | ||||||||||||||
Depreciation and amortization | 5,260 | 5,558 | 1,685 | 1,716 | ||||||||||||
Gain on pension settlement | (520 | ) | - | |||||||||||||
Gain on disposal of assets | (271 | ) | (66 | ) | - | (274 | ) | |||||||||
Deferred income tax expense | 1,461 | 254 | (10,045 | ) | 2,344 | |||||||||||
Noncash restricted stock and performance awards | 891 | 919 | 605 | 463 | ||||||||||||
Provision/(benefit from) for doubtful accounts and sales allowances | 1,365 | (1,692 | ) | |||||||||||||
(Benefit from)/provision for doubtful accounts and sales allowances | (328 | ) | 862 | |||||||||||||
Gain on life insurance policies | (715 | ) | (608 | ) | (571 | ) | (555 | ) | ||||||||
Changes in assets and liabilities: | Changes in assets and liabilities: | |||||||||||||||
Trade accounts receivable | 18,589 | 9,036 | 24,129 | 33,451 | ||||||||||||
Inventories | 1,589 | (16,862 | ) | 10,763 | (5,561 | ) | ||||||||||
Income tax recoverable | (2,348 | ) | - | (867 | ) | - | ||||||||||
Prepaid expenses and other current assets | (638 | ) | (484 | ) | (1,468 | ) | (3,186 | ) | ||||||||
Trade accounts payable | (13,456 | ) | 5,566 | (12,149 | ) | (8,165 | ) | |||||||||
Accrued salaries, wages, and benefits | (2,553 | ) | (484 | ) | (1,661 | ) | (3,266 | ) | ||||||||
Accrued income taxes | (3,159 | ) | (2,412 | ) | - | (1,867 | ) | |||||||||
Customer deposits | 10,006 | (1,359 | ) | 673 | 3,117 | |||||||||||
Operating lease liabilities | 536 | - | 367 | (167 | ) | |||||||||||
Other accrued expenses | 350 | 503 | (1,720 | ) | (664 | ) | ||||||||||
Deferred compensation | 156 | (2,253 | ) | 12 | 51 | |||||||||||
Other long-term liabilities | - | 122 | ||||||||||||||
Net cash provided by operating activities | $ | 26,610 | $ | 20,919 | $ | 18,924 | $ | 20,286 | ||||||||
Investing Activities: | Investing Activities: | |||||||||||||||
Purchases of property and equipment | (4,745 | ) | (2,464 | ) | (380 | ) | (1,527 | ) | ||||||||
Proceeds received from sale of assets | 1,465 | 99 | ||||||||||||||
Proceeds received on notes from sale of assets | - | 1,449 | ||||||||||||||
Premiums paid on life insurance policies | (162 | ) | (157 | ) | ||||||||||||
Proceeds received on life insurance policies | - | 1,225 | 673 | - | ||||||||||||
Premiums paid on life insurance policies | (558 | ) | (620 | ) | ||||||||||||
Net cash used in investing activities | (3,838 | ) | (1,760 | ) | ||||||||||||
Net cash provided/(used in) by investing activities | 131 | (235 | ) | |||||||||||||
Financing Activities: | Financing Activities: | |||||||||||||||
Payments for long-term debt | (4,393 | ) | (15,679 | ) | (1,952 | ) | (1,464 | ) | ||||||||
Cash dividends paid | (5,316 | ) | (4,946 | ) | (1,894 | ) | (1,768 | ) | ||||||||
Net cash used in financing activities | (9,709 | ) | (20,625 | ) | ||||||||||||
Cash used in financing activities | (3,846 | ) | (3,232 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | 13,063 | (1,466 | ) | |||||||||||||
Net increase in cash and cash equivalents | 15,209 | 16,819 | ||||||||||||||
Cash and cash equivalents - beginning of year | 11,435 | 30,915 | 36,031 | 11,435 | ||||||||||||
Cash and cash equivalents - end of quarter | $ | 24,498 | $ | 29,449 | $ | 51,240 | $ | 28,254 | ||||||||
Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | |||||||||||||||
Cash paid for interest, net | $ | 240 | $ | 329 | ||||||||||||
Cash paid for income taxes | $ | 6,754 | $ | 9,661 | 43 | 38 | ||||||||||
Cash paid for interest, net | 852 | 973 | ||||||||||||||
Non-cash transactions: | Non-cash transactions: | |||||||||||||||
Increase in lease liabilities arising from obtaining right-of-use assets | $ | 272 | $ | - | ||||||||||||
Decrease in lease liabilities arising from obtaining right-of-use assets | $ | (3 | ) | $ | - | |||||||||||
Increase in property and equipment through accrued purchases | 25 | 104 | 51 | 743 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
(In thousands, except per share data) |
(Unaudited) |
Accumulated | Accumulated | |||||||||||||||||||||||||||||||||||||||
Other | Total | Other | Total | |||||||||||||||||||||||||||||||||||||
Common Stock | Retained | Comprehensive | Shareholders' | Common Stock | Retained | Comprehensive | Shareholders' | |||||||||||||||||||||||||||||||||
Shares | Amount | Earnings | Income | Equity | Shares | Amount | Earnings | Income (loss) | Equity | |||||||||||||||||||||||||||||||
Balance at January 28, 2018 | 11,762 | $ | 48,970 | $ | 180,122 | $ | 368 | $ | 229,460 | |||||||||||||||||||||||||||||||
Net income | 25,181 | 25,181 | ||||||||||||||||||||||||||||||||||||||
Prior year adjustment for ASU 2014-09 and 2018-02 | 99 | 111 | 210 | |||||||||||||||||||||||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $31 | 98 | 98 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and accrued ($0.14 per share) | (4,945 | ) | (4,945 | ) | ||||||||||||||||||||||||||||||||||||
Restricted stock grants, net of forfeitures | 23 | (30 | ) | (30 | ) | |||||||||||||||||||||||||||||||||||
Restricted stock compensation cost | 450 | 450 | ||||||||||||||||||||||||||||||||||||||
Balance at October 28, 2018 | 11,785 | $ | 49,390 | $ | 200,457 | $ | 577 | $ | 250,424 | |||||||||||||||||||||||||||||||
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 | 10,067 | 10,067 | 1,987 | 1,987 | ||||||||||||||||||||||||||||||||||||
Gain on pension settlement, net of tax of $124 | (396 | ) | (396 | ) | ||||||||||||||||||||||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $27 | 84 | 84 | ||||||||||||||||||||||||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $9 | 28 | 28 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and accrued ($0.15 per share) | (5,316 | ) | (5,316 | ) | (1,768 | ) | (1,768 | ) | ||||||||||||||||||||||||||||||||
Restricted stock grants, net of forfeitures | 53 | 344 | 344 | 31 | 344 | 344 | ||||||||||||||||||||||||||||||||||
Restricted stock compensation cost | 600 | 600 | 174 | 174 | ||||||||||||||||||||||||||||||||||||
Recognition of PSUs as equity-based awards | 684 | 684 | 681 | 681 | ||||||||||||||||||||||||||||||||||||
Balance at November 3, 2019 | 11,838 | $ | 51,177 | $ | 218,131 | $ | (65 | ) | $ | 269,243 | ||||||||||||||||||||||||||||||
Balance at May 5, 2019 | 11,816 | $ | 50,748 | $ | 213,599 | $ | 275 | $ | 264,622 | |||||||||||||||||||||||||||||||
Balance at February 2, 2020 | 11,838 | $ | 51,582 | $ | 223,252 | $ | (713 | ) | $ | 274,121 | ||||||||||||||||||||||||||||||
Net loss | (34,819 | ) | (34,819 | ) | ||||||||||||||||||||||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $20 | 64 | 64 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid and accrued ($0.16 per share) | (1,893 | ) | (1,893 | ) | ||||||||||||||||||||||||||||||||||||
Restricted stock grants, net of forfeitures | 33 | 169 | 169 | |||||||||||||||||||||||||||||||||||||
Restricted stock compensation cost | 218 | 218 | ||||||||||||||||||||||||||||||||||||||
Recognition of PSUs as equity-based awards | 218 | 218 | ||||||||||||||||||||||||||||||||||||||
Balance at May 3, 2020 | 11,871 | $ | 52,187 | $ | 186,540 | $ | (649 | ) | $ | 238,078 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Thirty-NineThirteen Weeks Ended NovemberMay 3, 20192020
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The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended February 3, 20192, 2020 (“20192020 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.
The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third“first quarter” or “quarterly period”) that began August 5, 2019,February 3, 2020 and the thirty-nine week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began February 4, 2019, which both ended NovemberMay 3, 2019.2020. This report discusses our results of operations for this period compared to the 2019 fiscal year thirteen-week period that began July 30, 2018February 4, 2019 and the thirty-nine-week period that began January 29, 2018, which both ended October 28, 2018;May 5, 2019; and our financial condition as of NovemberMay 3, 20192020 compared to February 3, 2019.2, 2020.
References in these notes to the condensed consolidated financial statements of the Company to:
■ | the 2021 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 3, 2020 and will end January 31, 2021; and |
■ | the 2020 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 4, 2019 and |
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. Consequently, the segment disclosures in this filing have been recast to reflect these changes and therefore differ from prior quarterly filings. See Note 13 Segment Information for additional details. |
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2. Recently Adopted Accounting Policies
In FebruaryJune 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“Topic 842”), which requires lessees2016-13, Financial Instruments—Credit Losses (Topic 326). This update seeks to recognize lease right-of-use assets and liabilities on-balance sheet and disclose keyprovide financial statement users with more decision-useful information about leasing arrangements. ASU 2016-02 was subsequently amendedthe expected credit losses on financial instruments, including trade receivables, and other commitments to extend credit held by ASU No. 2018-01, Land Easement Practical Expedienta 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 Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases;fiscal years, and ASU No. 2018-11, Targeted Improvements.interim periods within those fiscal years, beginning after December 15, 2019. We adopted the provisions of Topic 842 standard326 on February 4,3, 2020, the first day of our 2021 fiscal year. The adoption of this standard did not have a material effect on our condensed consolidated financial statements or results of operations. We will continue to actively monitor the impact of the COVID-19 pandemic on expected credit losses.
In December 2019, the FASB issued ASU 2019-12, Income Tax (Topic 740) – Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions for intraperiod tax allocation, the recognition of deferred tax liabilities after an investment in a foreign entity transitions to or from the equity method, and used the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments also introduce new guidance on determining how to apply the income tax guidance to franchise taxes that are partially based on income, clarifying the accounting for transactions that result in a step-up in the tax basis of goodwill, and the effect of an enacted change in tax laws or rates in the annual effective date transition method. As a result,tax rate computation in the interim period. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. We elected to adopt ASU 2019-12 on February 3, 2020, the first day of our 2021 fiscal year. The adoption of this standard impacted 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 lease liabilities and corresponding lease assets on the condensed consolidated balance sheets. In addition, we have elected the package of practical expedients, which allowed us not to reassess prior conclusions related to the expired or existing leases, and not to reassess the accounting for initial direct costs. As a result of the adoption of Topic 842, we have operating lease right-of-use assets of $40.9 million and operating lease liabilities of $41.7 million as of November 3, 2019. The adoption of Topic 842 did not have a material impact on our condensed consolidated statements of income and condensed consolidated statement of cash flows for the three-month or nine-month period ended November 3, 2019.operations by $4.0 million. See Note 912 Income Taxes for additional information and disclosures required by Topic 842.details.
3. Accounts Receivable
November 3, | February 3, | May 3, | February 2, | |||||||||||||
2019 | 2019 | 2020 | 2020 | |||||||||||||
Trade accounts receivable | $ | 98,818 | $ | 117,732 | $ | 68,204 | $ | 91,261 | ||||||||
Receivable from factor | $ | 5 | $ | 788 | ||||||||||||
Other accounts receivable allowances | (5,452 | ) | (4,267 | ) | (2,881 | ) | (3,493 | ) | ||||||||
Allowance for doubtful accounts | (763 | ) | (908 | ) | (1,476 | ) | (903 | ) | ||||||||
Accounts receivable | $ | 92,603 | $ | 112,557 | $ | 63,852 | $ | 87,653 |
“Receivable from factor” represented amounts due with respect to factored accounts receivable. The agreement was discontinued in early fiscal 2021.
4. Inventories
November 3, | February 3, | May 3, | February 2, | |||||||||||||
2019 | 2019 | 2020 | 2020 | |||||||||||||
Finished furniture | $ | 116,501 | $ | 112,847 | $ | 95,628 | $ | 106,495 | ||||||||
Furniture in process | 1,092 | 1,825 | 1,323 | 1,304 | ||||||||||||
Materials and supplies | 8,965 | 10,896 | 8,495 | 8,479 | ||||||||||||
Inventories at FIFO | 126,558 | 125,568 | 105,446 | 116,278 | ||||||||||||
Reduction to LIFO basis | (22,943 | ) | (20,364 | ) | (23,396 | ) | (23,465 | ) | ||||||||
Inventories | $ | 103,615 | $ | 105,204 | $ | 82,050 | $ | 92,813 |
5. Property, Plant and Equipment
Depreciable Lives | November 3, | February 3, | Depreciable Lives | May 3, | February 2, | |||||||||||||||||
(In years) | 2019 | 2019 | (In years) | 2020 | 2020 | |||||||||||||||||
Buildings and land improvements | 15 - 30 | $ | 31,295 | $ | 24,588 | 15 - 30 | $ | 31,316 | $ | 31,316 | ||||||||||||
Computer software and hardware | 3 - 10 | 19,100 | 18,719 | 3 - 10 | 19,219 | 19,166 | ||||||||||||||||
Machinery and equipment | 10 | 9,116 | 8,934 | 10 | 9,304 | 9,271 | ||||||||||||||||
Leasehold improvements | Term of lease | 9,443 | 9,376 | Term of lease | 9,737 | 9,737 | ||||||||||||||||
Furniture and fixtures | 3 - 10 | 2,454 | 2,318 | 3 - 10 | 2,599 | 2,597 | ||||||||||||||||
Other | 5 | 650 | 665 | 5 | 651 | 651 | ||||||||||||||||
Total depreciable property at cost | 72,058 | 64,600 | 72,826 | 72,738 | ||||||||||||||||||
Less accumulated depreciation | 42,853 | 39,925 | 45,172 | 44,089 | ||||||||||||||||||
Total depreciable property, net | 29,205 | 24,675 | 27,654 | 28,649 | ||||||||||||||||||
Land | 1,077 | 1,067 | 1,077 | 1,077 | ||||||||||||||||||
Construction-in-progress | 500 | 3,740 | 525 | 181 | ||||||||||||||||||
Property, plant and equipment, net | $ | 30,782 | $ | 29,482 | $ | 29,256 | $ | 29,907 |
6. 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 NovemberMay 3, 20192020 and February 3, 2019,2, 2020, 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.
On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. We settled all Pension Plan obligations during the quarter with the purchase of annuities for plan participants. See Note 11. Employee Benefit Plans for additional information about the Plan.
Our assets measured at fair value on a recurring basis at NovemberMay 3, 20192020 and February 3, 2019,2, 2020, were as follows:
Fair value at November 3, 2019 | Fair value at February 3, 2019 | Fair value at May 3, 2020 | Fair value at February 2, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets measured at fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company-owned life insurance | $ | - | $ | 25,016 | $ | - | $ | 25,016 | $ | - | $ | 23,816 | $ | - | $ | 23,816 | $ | - | $ | 25,603 | $ | - | $ | 25,603 | $ | - | $ | 24,888 | $ | - | $ | 24,888 | ||||||||||||||||||||||||||||||||
Pension Plan assets | $ | - | - | - | - | 10,992 | - | - | 10,992 |
7. Intangible Assets
November 3, | February 3, | ||||||||
Non-amortizable Intangible Assets | Segment | 2019 | 2019 | ||||||
Goodwill | Home Meridian | $ | 23,187 | $ | 23,187 | ||||
Goodwill | All Other | 16,871 | 16,871 | ||||||
Total Goodwill | 40,058 | 40,058 | |||||||
Trademarks and trade names - Home Meridian | Home Meridian | 11,400 | 11,400 | ||||||
Trademarks and trade names - Bradington-Young | All Other | 861 | 861 | ||||||
Trademarks and trade names - Sam Moore | All Other | 396 | 396 | ||||||
Total Trademarks and trade names | $ | 12,657 | $ | 12,657 | |||||
Total non-amortizable assets | $ | 52,715 | $ | 52,715 |
The adverse economic effects brought on by the COVID-19 pandemic, including reductions in our sales, earnings, and market value, as well as other changing market dynamics, required that we perform a valuation of our intangible assets. We hired an external service provider to perform the valuation of our goodwill and intangible assets..
The calculation methodology for the fair value of our Home Meridian segment and the Shenandoah division of our Domestic Upholstery segment included three approaches: the Discounted Cash Flow Method (DCF) which was given the largest weighting, the Guideline Public Company Method (GPCM) based on the consideration of the facts of the Company’s peer competitors and the Guideline Transaction Method (GTM) based on consideration of transactions with varying risk profiles, geographies and market conditions.
The Discounted Cash Flow Method was used as the valuation methodology for our trade names and trademarks, based on cash flow projections and growth rates for each trade name for five years in the future provided by management, and a royalty rate benchmark for companies with similar activities.
As a result of our intangible asset valuation analysis, we recorded $44.3 million non-cash impartment charges including $23.2 million to Home Meridian goodwill, $16.4 million to Shenandoah goodwill, and $4.8 million to certain of Home Meridian segment’s trade names.
May 3, 2020 | February 2, 2020 | ||||||||||||||||||||||||
Non-amortizable Intangible Assets | Segment | Beginning Balance | Impairment Charges | Net Book Value | Beginning Balance | Impairment Charges | Net Book Value | ||||||||||||||||||
Goodwill | Home Meridian | $ | 23,187 | $ | (23,187 | ) | $ | - | $ | 23,187 | $ | - | $ | 23,187 | |||||||||||
Goodwill | Domestic Upholstery | 16,871 | (16,381 | ) | 490 | 16,871 | - | 16,871 | |||||||||||||||||
Total Goodwill | 40,058 | (39,568 | ) | 490 | 40,058 | - | 40,058 | ||||||||||||||||||
Trademarks and trade names - Home Meridian | Home Meridian | 11,400 | (4,750 | ) | 6,650 | 11,400 | - | 11,400 | |||||||||||||||||
Trademarks and trade names - Bradington-Young | Domestic Upholstery | 861 | - | 861 | 861 | - | 861 | ||||||||||||||||||
Trademarks and trade names - Sam Moore | Domestic Upholstery | 396 | - | 396 | 396 | - | 396 | ||||||||||||||||||
Total Trademarks and trade names | $ | 12,657 | $ | (4,750 | ) | $ | 7,907 | $ | 12,657 | $ | - | $ | 12,657 | ||||||||||||
Total non-amortizable assets | $ | 52,715 | $ | (44,318 | ) | $ | 8,397 | $ | 52,715 | $ | - | $ | 52,715 |
Our amortizable intangible assets are recorded in our Home Meridian segment and All Other.Domestic Upholstery segments. The carrying amounts and changes therein of those amortizable intangible assets were as follows:
Amortizable Intangible Assets | ||||||||||||
Customer | ||||||||||||
Relationships | Trademarks | Totals | ||||||||||
Balance at February 3, 2019 | $ | 22,320 | $ | 778 | $ | 23,098 | ||||||
Amortization | (1,743 | ) | (45 | ) | (1,788 | ) | ||||||
Balance at November 3, 2019 | $ | 20,577 | $ | 733 | $ | 21,310 |
Amortizable Intangible Assets | ||||||||||||
Customer | ||||||||||||
Relationships | Trademarks | Totals | ||||||||||
Balance at February 2, 2020 | $ | 19,996 | $ | 718 | $ | 20,714 | ||||||
Amortization | (581 | ) | (15 | ) | (596 | ) | ||||||
Balance at May 3, 2020 | $ | 19,415 | $ | 703 | $ | 20,118 |
For the remainder of fiscal 2020,2021, amortization expense is expected to be approximately $596,000.$1.8 million.
8. Customer Deposits
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. These deposits have increased $10.0 million since our fiscal 2019 year-end principally due to increased order activity in our Home Meridian segment’s hospitality division.
9.8. Leases
On February 4, 2019,In fiscal 2020, we adopted Accounting Standards Codification Topic 842 Leases. Our lease assets are composed of real estate and equipment. Real estate leases consist primarily of warehouses 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.
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 $130,000 and $347,000$144,000 sub-lease income for the three-month and nine-month period ended NovemberMay 3, 2019, respectively.
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.
2020. The components of lease cost and supplemental cash flow information for leases for the three-month and nine-month periodsthree-months ended NovemberMay 3, 20192020 were:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | 13 Weeks Ended | 13 Weeks Ended | |||||||||||||
November 3, 2019 | November 3, 2019 | May 3, 2020 | May 5, 2019 | |||||||||||||
Operating lease cost | $ | 2,090 | $ | 6,289 | $ | 2,100 | $ | 2,076 | ||||||||
Variable lease cost | 46 | - | ||||||||||||||
Short-term lease cost | 173 | 467 | 116 | 113 | ||||||||||||
Total operating lease cost | $ | 2,263 | $ | 6,756 | $ | 2,262 | $ | 2,189 | ||||||||
Operating cash outflows | $ | 1,918 | $ | 6,255 | $ | 1,852 | $ | 2,386 |
The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of NovemberMay 3, 20192020 were:
November 3, 2019 | May 3, 2020 | February 2, 2020 | ||||||||||
Real estate | $ | 39,750 | $ | 36,585 | $ | 38,175 | ||||||
Property and equipment | 1,122 | 1,201 | 1,337 | |||||||||
Total operating leases right-of-use assets | $ | 40,872 | $ | 37,786 | $ | 39,512 | ||||||
Current portion of operating lease liabilities | $ | 6,395 | $ | 6,162 | $ | 6,307 | ||||||
Long term operating lease liabilities | 35,304 | 32,581 | 33,794 | |||||||||
Total operating lease liabilities | $ | 41,699 | $ | 38,743 | $ | 40,101 |
Weighted-averageThe weighted-average remaining lease term is 7.57.3 years. We used our incremental borrowing rate which is LIBOR plus 1.5% at the adoption date. The weighted-average discount rate is 4.00%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 Novembersheets on May 3, 2019:2020:
Undiscounted Future Operating Lease Payments | Undiscounted Future Operating Lease Payments | |||||||
Remainder of 2019 | $ | 2,327 | ||||||
2020 | 7,732 | |||||||
Remainder of 2020 | $ | 6,051 | ||||||
2021 | 7,114 | 7,182 | ||||||
2022 | 5,520 | 5,588 | ||||||
2023 | 5,267 | 5,333 | ||||||
2024 and thereafter | 20,394 | |||||||
2024 | 5,280 | |||||||
2025 and thereafter | 15,205 | |||||||
Total lease payments | $ | 48,354 | $ | 44,639 | ||||
Less: impact of discounting | (6,655 | ) | (5,896 | ) | ||||
Present value of lease payments | $ | 41,699 | $ | 38,743 |
Due to the COVID-19 pandemic, we received concessions on several of our leases, including changes in lease terms and deferred rent payments. We accounted for the concessions as lease modifications. None of the modifications had a material effect on our condensed consolidated financial statements or results of operations. As of NovemberMay 3, 2019,2020, we did not have any additional operating or finance leases that had not yet commenced.
109. Long-Term Debt
As of NovemberMay 3, 2019,2020, we had an aggregate $25.7 million available under our revolving credit facilitythe Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of NovemberMay 3, 2019.2020. There were no additional borrowings outstanding under the Existing Revolver as of May 3, 2020.
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. The full remaining principal amounts of $28.2 million on our term loans are due on February 1, 2021. We expect to refinance the balance of our term loans and any balance due under our revolving credit facility as(currently $0) during fiscal 2021.
1110. Employee Benefit Plans
We maintain threetwo “frozen” retirement plans, forwhich are paying benefits and may include active employees among the benefit of certain former and current employees, including a supplemental retirement income plan (“SRIP”) for certain former and current employees of Hooker Furniture Corporation, as well asparticipants. We do not expect to add participants to these plans in the future. The two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, which we assumed when we acquired the business of Home Meridian International. These legacy pension plan obligations 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. |
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The SRIP, SERP and Pension Plan are all “frozen” and we do not expect to add additional participants to any of these plans in the future.
On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. We settled all Pension Plan obligations during the quarter with the purchase of nonparticipating annuity contracts for plan participants. Consequently, we recognized a $520,000 settlement gain during the quarter, which is recorded in the “other income” line of our condensed consolidated statements of income. The $520,000 represented an amount recorded in accumulated other comprehensive income until the pension obligation was settled upon plan termination.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||
November 3, | October 28, | November 3, | October 28, | May 3, | May 5, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Net periodic benefit costs | ||||||||||||||||||||||||
Service cost | 26 | 81 | 78 | 243 | 32 | 26 | ||||||||||||||||||
Interest cost | 204 | 206 | 613 | 618 | 74 | 205 | ||||||||||||||||||
Actuarial loss | 37 | 43 | 111 | 129 | 84 | 37 | ||||||||||||||||||
Expected return on pension plan assets | (101 | ) | (144 | ) | (304 | ) | (431 | ) | - | (101 | ) | |||||||||||||
Pension plan administrative expenses | 98 | 70 | 293 | 210 | ||||||||||||||||||||
Expected administrative expenses | - | 97 | ||||||||||||||||||||||
Consolidated net periodic benefit costs | $ | 264 | $ | 256 | $ | 791 | $ | 769 | $ | 190 | $ | 264 |
The SRIP and SERP plans are unfunded plans. We paid $171,000 in the third quarter and $520,000$178,000 in the first nine months. Wequarter of fiscal 2021 and expect to pay a total of approximately $164,000$551,000 in benefit payments from our general assets during the remainder of fiscal 20202021 to fund SRIP and SERP payments.
121. Earnings Per Share
We refer you to the discussion of Earnings Per Share in Note 2. Summary of Significant Accounting Policies, in the financial statements included in our 20192020 Annual Report, for additional 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 non-executive employees since 2014. We have issued restricted stock units (“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 period-end dates indicated:
November 3, | February 3, | May 3, | February 2, | |||||||||||||
2019 | 2019 | 2020 | 2020 | |||||||||||||
Restricted shares | 49 | 22 | 60 | 46 | ||||||||||||
RSUs and PSUs | 78 | 36 | 159 | 76 | ||||||||||||
127 | 58 | 219 | 122 |
The number of 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. The number of RSUs and PSUs increased primarily due to the addition of three additional executive officers in the second quarter of fiscal 2019.
All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||
Less: Unvested participating restricted stock dividends | 7 | 3 | 18 | 8 | ||||||||||||
Net earnings allocated to unvested participating restricted stock | 16 | 17 | 33 | 41 | ||||||||||||
Earnings available for common shareholders | 3,897 | 9,312 | 10,016 | 25,132 | ||||||||||||
Weighted average shares outstanding for basic earnings per share | 11,789 | 11,763 | 11,782 | 11,758 | ||||||||||||
Dilutive effect of unvested restricted stock, RSU and PSU awards | 27 | 15 | 39 | 20 | ||||||||||||
Weighted average shares outstanding for diluted earnings per share | 11,816 | 11,778 | 11,821 | 11,778 | ||||||||||||
Basic earnings per share | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.14 | ||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.13 |
Thirteen Weeks Ended | ||||||||
May 3, | May 5, | |||||||
2020 | 2019 | |||||||
Net (loss)/ income | $ | (34,819 | ) | $ | 1,987 | |||
Less: Unvested participating restricted stock dividends | 8 | 4 | ||||||
Net earnings allocated to unvested participating restricted stock | - | 4 | ||||||
(Loss)/earnings available for common shareholders | (34,827 | ) | 1,979 | |||||
Weighted average shares outstanding for basic earnings per share | 11,798 | 11,769 | ||||||
Dilutive effect of unvested restricted stock, RSU and PSU awards* | - | 36 | ||||||
Weighted average shares outstanding for diluted earnings per share | 11,798 | 11,805 | ||||||
Basic (loss) / earnings per share | $ | (2.95 | ) | $ | 0.17 | |||
Diluted (loss) / earnings per share | $ | (2.95 | ) | $ | 0.17 |
*Due to the net loss recorded in the fiscal 2021 first quarter, approximately 36,000 potentially dilutive shares would have been antidilutive and are therefore excluded from the calculation above.
132. Income Taxes
We recorded income tax expensebenefit of $1.1$10.9 million for the fiscal 2020 third2021 first quarter, of which income tax benefit of $10.6 million was recorded related to goodwill and trade name impairment charges, compared to $2.8 million$515,000 income tax expense for the comparable prior year period. The effective tax rates for the fiscal 2021 and 2020 and 2019 thirdfirst quarters were 21.4%23.8% and 22.9%20.6%, respectively. The
An entity is required to make its best estimate of the annual effective tax ratesrate for the full fiscal year at the end of each interim period and to use this rate to calculate its income taxes on a year-to-date basis. Under the current income tax guidance, there is an exception that when the year-to-date loss for an interim period exceeds the projected loss for the full fiscal year, the income tax benefit recognized year-to-date is limited to the amount of benefit that would be recognized if the year-to-date loss were the anticipated loss for the full fiscal year. ASU 2019-12 removes this exception and no longer limits the computed benefit. We elected to early adopt ASU 2019-12 in the first nine monthsquarter of fiscal 20202021 and 2019 were 21.9% and 23.0%.recognized an additional $4.0 million of tax benefit that exceeds our anticipated annual income tax benefit.
The net unrecognized tax benefits as of NovemberMay 3, 20192020 and February 3, 2019,2, 2020, which, if recognized, would affect our effective tax rate are $40,000 and $38,000, respectively.$3,000.
Tax years ending January 31, 201629, 2017 through February 3, 20192, 2020 remain subject to examination by federal and state taxing authorities.
143. Segment Information
ForAs 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 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. 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; |
■ | Domestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore and Shenandoah Furniture; and |
■ | All Other, |
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:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | November 3, 2019 | October 28, 2018 | May 3, 2020 | May 5, 2019 | |||||||||||||||||||||||||||||||||||||||||||
% Net | % Net | % Net | % Net | % Net | % Net | |||||||||||||||||||||||||||||||||||||||||||
Net Sales | �� | Sales | Sales | Sales | Sales | Sales | Sales | |||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 43,703 | 27.6 | % | $ | 46,479 | 27.1 | % | $ | 122,707 | 27.5 | % | $ | 129,801 | 26.9 | % | $ | 27,162 | 26.0 | % | $ | 39,600 | 29.2 | % | ||||||||||||||||||||||||
Home Meridian | 85,776 | 54.3 | % | 95,013 | 55.4 | % | 240,594 | 54.0 | % | 266,631 | 55.2 | % | 57,665 | 55.1 | % | 67,630 | 49.9 | % | ||||||||||||||||||||||||||||||
Domestic Upholstery | 16,783 | 16.0 | % | 25,324 | 18.7 | % | ||||||||||||||||||||||||||||||||||||||||||
All Other | 28,697 | 18.1 | % | 29,982 | 17.5 | % | 82,641 | 18.5 | % | 86,594 | 17.9 | % | 2,987 | 2.9 | % | 2,964 | 2.2 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 158,176 | 100.0 | % | $ | 171,474 | 100.0 | % | $ | 445,942 | 100.0 | % | $ | 483,026 | 100.0 | % | $ | 104,597 | 100.0 | % | $ | 135,518 | 100.0 | % | ||||||||||||||||||||||||
Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 13,947 | 31.9 | % | $ | 14,334 | 30.8 | % | $ | 38,323 | 31.2 | % | $ | 41,372 | 31.9 | % | $ | 8,005 | 29.5 | % | $ | 12,556 | 31.7 | % | ||||||||||||||||||||||||
Home Meridian | 7,286 | 8.5 | % | 15,382 | 16.2 | % | 24,139 | 10.0 | % | 43,196 | 16.2 | % | 6,809 | 11.8 | % | 5,903 | 8.7 | % | ||||||||||||||||||||||||||||||
Domestic Upholstery | 2,783 | 16.6 | % | 6,002 | 23.7 | % | ||||||||||||||||||||||||||||||||||||||||||
All Other | 7,166 | 25.0 | % | 6,120 | 20.4 | % | 20,279 | 24.5 | % | 18,879 | 21.8 | % | 1,056 | 35.4 | % | 1,056 | 35.6 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 28,399 | 18.0 | % | $ | 35,836 | 20.9 | % | $ | 82,741 | 18.6 | % | $ | 103,447 | 21.4 | % | $ | 18,653 | 17.8 | % | $ | 25,517 | 18.8 | % | ||||||||||||||||||||||||
Operating Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||
Operating (loss)/Income | ||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 6,188 | 14.2 | % | $ | 5,712 | 12.3 | % | $ | 15,453 | 12.6 | % | $ | 17,381 | 13.4 | % | $ | 1,333 | 4.9 | % | $ | 5,177 | 13.1 | % | ||||||||||||||||||||||||
Home Meridian | (3,955 | ) | -4.6 | % | 4,829 | 5.1 | % | (9,013 | ) | -3.7 | % | 10,168 | 3.8 | % | (30,348 | ) | -52.6 | % | (4,993 | ) | -7.4 | % | ||||||||||||||||||||||||||
Domestic Upholstery | (16,810 | ) |
| -100.2 | % | 2,292 | 9.1 | % | ||||||||||||||||||||||||||||||||||||||||
All Other | 2,760 | 9.6 | % | 1,720 | 5.7 | % | 7,227 | 8.7 | % | 5,960 | 6.9 | % | 387 | 12.9 | % | 429 | 14.5 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 4,993 | 3.2 | % | $ | 12,261 | 7.2 | % | $ | 13,667 | 3.1 | % | $ | 33,509 | 6.9 | % | $ | (45,438 | ) | -43.4 | % | $ | 2,905 | 2.1 | % | |||||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 89 | $ | 350 | $ | 600 | $ | 699 | $ | 53 | $ | 125 | ||||||||||||||||||||||||||||||||||||
Home Meridian | 126 | 143 | 300 | 330 | 89 | 117 | ||||||||||||||||||||||||||||||||||||||||||
Domestic Upholstery | 238 | 1,285 | ||||||||||||||||||||||||||||||||||||||||||||||
All Other | 871 | 1,138 | 3,845 | 1,435 | - | - | ||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 1,086 | $ | 1,631 | $ | 4,745 | $ | 2,464 | $ | 380 | $ | 1,527 | ||||||||||||||||||||||||||||||||||||
Depreciation & Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation | ||||||||||||||||||||||||||||||||||||||||||||||||
& Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 471 | $ | 984 | $ | 1,453 | $ | 1,479 | $ | 455 | $ | 492 | ||||||||||||||||||||||||||||||||||||
Home Meridian | 549 | 851 | 1,627 | 1,795 | 528 | 531 | ||||||||||||||||||||||||||||||||||||||||||
Domestic Upholstery | 699 | 690 | ||||||||||||||||||||||||||||||||||||||||||||||
All Other | 768 | 1,248 | 2,180 | 2,284 | 3 | 3 | ||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 1,788 | $ | 3,083 | $ | 5,260 | $ | 5,558 | $ | 1,685 | $ | 1,716 |
As of November 3, | As of February 3, | As of May 3, | As of February 2, | |||||||||||||||||||||||||||||||||||||||||||||
2019 | %Total | 2019 | %Total | 2020 | %Total | 2020 | %Total | |||||||||||||||||||||||||||||||||||||||||
Identifiable Assets | Assets | Assets | Assets | Assets | ||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 140,920 | 42.9 | % | $ | 108,445 | 36.9 | % | $ | 153,298 | 49.3 | % | $ | 144,112 | 45.0 | % | ||||||||||||||||||||||||||||||||
Home Meridian | 146,971 | 44.8 | % | 144,277 | 49.1 | % | 111,905 | 36.0 | % | 138,313 | 43.2 | % | ||||||||||||||||||||||||||||||||||||
Domestic Upholstery | 43,840 | 14.1 | % | 36,085 | 11.3 | % | ||||||||||||||||||||||||||||||||||||||||||
All Other | 40,525 | 12.3 | % | 41,181 | 14.0 | % | 1,924 | 0.6 | % | 1,769 | 0.5 | % | ||||||||||||||||||||||||||||||||||||
Consolidated | $ | 328,416 | 100.0 | % | $ | 293,903 | 100.0 | % | $ | 310,967 | 100.0 | % | $ | 320,279 | 100.0 | % | ||||||||||||||||||||||||||||||||
Consolidated Goodwill and Intangibles | 74,025 | 75,813 | 28,515 | 73,429 | ||||||||||||||||||||||||||||||||||||||||||||
Total Consolidated Assets | $ | 402,441 | $ | 369,716 | $ | 339,482 | $ | 393,708 |
Sales by product type are as follows:
Net Sales (in thousands) | Net Sales (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | %Total | October 28, 2018 | %Total | November 3, 2019 | %Total | October 28, 2018 | %Total | May 3, 2020 | %Total | May 5, 2019 | %Total | |||||||||||||||||||||||||||||||||||||
Casegoods | $ | 105,018 | 66 | % | $ | 108,584 | 63 | % | $ | 288,470 | 65 | % | $ | 304,370 | 63 | % | $ | 63,602 | 61 | % | $ | 84,464 | 62 | % | ||||||||||||||||||||||||
Upholstery | 53,158 | 34 | % | 62,890 | 37 | % | 157,472 | 35 | % | 178,656 | 37 | % | 40,995 | 39 | % | 51,054 | 38 | % | ||||||||||||||||||||||||||||||
$ | 158,176 | 100 | % | $ | 171,474 | 100 | % | $ | 445,942 | 100 | % | $ | 483,026 | 100 | % | $ | 104,597 | 100 | % | $ | 135,518 | 100 | % |
154. Subsequent Events
Dividends
On December 5, 2019,June 2, 2020, our board of directors declared a quarterly cash dividend of $0.16 per share, an increase of 6.7% or $0.01 per share, payablewhich was paid on DecemberJune 30, 20192020 to shareholders of record at DecemberJune 16, 2019.2020.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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”,” “Hooker DivisionDivision”,” “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 Bradington-Young, Sam Moore, Shenandoah FurnitureH Contract and H Contract.Lifestyle Brands.
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.
Forward-Looking Statements
Certain statements made in this report, including statements under Item 2. “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 negatives thereof, or other variations thereof, 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 a wide range of 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, the retail environment and our 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; |
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■ | 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; |
■ | 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 or significant delays in collecting such amounts; |
■ | 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; |
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■ | risks related to our other defined benefit plans; |
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■ | 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; |
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■ | 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; |
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■ | 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” in our 20192020 annual report on Form 10-K (the “2019“2020 Annual Report”).
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.
This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third“first quarter” or “quarterly period”) that began August 5, 2019,February 3, 2020 and the thirty-nine week period (also referred to as “nine months,” “nine-month period” or “year-to-date period”) that began February 4, 2019, which both ended NovemberMay 3, 2019.2020. This report discusses our results of operations for this period compared to the 20192020 fiscal year thirteen-week period that began July 30, 2018February 4, 2019 and the thirty-nine-week period that began January 29, 2018, which both ended October 28, 2018;May 5, 2019; and our financial condition as of NovemberMay 3, 20192020 compared to February 3, 2019.2, 2020.
References in this report to:
■ | the 2021 fiscal year and comparable terminology mean the fiscal year that began February 3, 2020 and will end January 31, 2021; and |
■ | the 2020 fiscal year and comparable terminology mean the fiscal year that began February 4, 2019 and |
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Dollar amounts presented in the tables below are in thousands except for per share data.
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 20192020 Annual Report. Our 20192020 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.
Our 20192020 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.
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 20182019 shipments to U.S. retailers, according to a 20192020 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 the business of 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 contracthospitality 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.
COVID-19
During the fiscal 2021 first quarter, COVID-19 was recognized as a global pandemic. 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 certain businesses were also ordered in certain jurisdictions and other businesses temporarily closed voluntarily. Consequently, the COVID-19 outbreak severely restricted the level of economic activity in the U.S. and around the world.
We monitor information on COVID-19 from the Centers for Disease Control and Prevention (“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 social distancing and mask policies, instituted daily temperature checks and have stepped-up facility cleaning at each location. Non-essential domestic travel for our employees has ceased and international travel has been prohibited outright. 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 virus and other issues. In addition, we are offering temporary paid leave to employees diagnosed with the virus (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 and anticipated re-openings.
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 our Board of Directors, temporary salary reductions for officers and other managers, rationalizing current import purchase orders and we are working with our vendors to cut costs and extend payment terms where we can.
Demand for home furnishings appears to be increasing as order rates in all divisions have increased. Orders plummeted over 70% year over year in March and approximately 65% year over year in April. Cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown partially drove the steep declines. Orders declined significantly during the first few weeks of May but then recovered resulting in an about a 5% overall reduction for the full month compared to the prior year. Fiscal June and July orders have continued this positive trend.
Executive Summary-ResultsSummary-Results of Operations
Consolidated net sales for the fiscal 2020 third2021 first quarter decreased $13.3by $30.9 million or 7.8%22.8% as compared to the prior year period, from $171.5$135.5 million to $158.2 million due primarily to $9.2 million or 9.7% net$104.6 million. Nearly 50% of the sales decrease occurred in April, the Home Meridian segment, and to a lesser extent netfirst full month we operated under COVID-19 crisis conditions, which caused greatly reduced demand for our products. We experienced significant sales decreases in all three reportable segments during the fiscal 2021 first quarter. Hooker Branded segment and All Other of $2.8 million and $1.3 million, respectively.
For the first nine months of fiscal 2020, consolidatedBranded’s net sales decreased $37.1by $12.4 million or 7.7% from $483.0 million to $445.9 million as compared to the prior year period due to sales decreases in both of our reportable segments as well as All Other.31.4%, Home Meridian segment net sales declined by $26.0 million or 9.8%, the Hooker Branded segmentMeridian’s net sales decreased $7.1by $10.0 million or 5.5%14.7% and Domestic Upholstery’s net sales decreased by $8.5 million or 33.7%. All Other net sales decreased $4.0 million or 4.6%,stayed essentially flat, all as compared to the fiscal 2019 nine-month2020 first quarter.
The adverse economic effects brought on by the COVID-19 pandemic triggered an interim intangible asset impairment analysis which required us to perform a valuation of our intangible assets. As a result of the valuation analysis, we recorded $44.3 million in non-cash impairment charges to write down goodwill and tradenames in our Home Meridian segment and goodwill in the Shenandoah division of our Domestic Upholstery segment. Our stock price was near a six-year low at the impairment measurement date at the end of the fiscal 2021 first quarter, which was near the zenith of the COVID-19 crisis to that point. Our deflated quarter-end market valuation was one of the primary inputs in the valuation analysis and the analysis indicated these assets were impaired and it was appropriate to write them down.
Primarily due to the impairment charge, but also due to lower sales, and despite cost cutting measures (described further on page 23), for the first time since the housing crisis over a decade ago, we reported quarterly operating and net losses in the fiscal 2021 first quarter. Consolidated net loss was $34.8 million compared to $2.0 million of net income reported in the fiscal 2020 first quarter. Loss per share was $2.95 as compared to earnings per share of $0.17 in the comparable prior year period.
Consolidated net income decreased $5.4 million or 58.0% and $15.1 million or 60.0%, as compared to the prior year third quarter and first nine months, respectively.
As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2020 third2021 first quarter and first nine months results of operations:
■ | Gross profit. |
■ | Selling and administrative expenses. Consolidated selling and administrative (“S&A”) expenses for fiscal 2021 first quarter decreased in absolute terms |
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■ | Operating |
Review
Our lower third quarterFiscal 2021 started on a positive note with increased incoming orders in February as compared with the prior year; however, the COVID-19 pandemic significantly impacted our business in March and April. Consolidated net sales decreased by about 23% compared to prior year first quarter. Decreased demand for home furnishings driven by the temporary closure of many of our customers’ stores and earningscontinuing deterioration in the retail environment were disappointing. They were impacted significantly by higher chargebacksthe primary drivers of the decline in orders and reduced volume from a single large retail customer in our Home Meridian segment. The lingering effects of 25% tariffs on finished goodssales. We reported operating and component parts imported from China, along with spotty retail demand that has continued throughnet losses for the first nine months of the year, also negatively affected our performance.
The sales decline with the single major customer represented 70% oftime in over a $9 million volume reduction at the Home Meridian segment, and approximately $3 million in chargebacks from the same retailer drove a $4.0 million operating loss for the quarter in the segment. That compares to operating income of about $5 million at Home Meridian in the same quarter a year ago. Several other factors also negatively affected Home Meridian’s current quarter results including about $600,000 in demurrage costs due to excess inventory that we added in anticipation of increased sales, and $450,000 in costs to store that inventory and additional excess inventory due to quality-related customer returns from a major customer last year. We also wrote that inventory down by $650,000 to market value during the quarter to increase the rate of sale. Additionally, Home Meridian incurred about $200,000 in start-up costs for HMIdea during the current quarter. These costs were partially offset by a $520,000 gain on the settlement of our pension plan during the quarter, recorded in other income.
decade. On a more positive note, Home Meridian’s hospitality andour e-commerce sales continued to grow. Samuel Lawrence Hospitality’s (“SLH”) net sales increased over 30% for the first nine months and ended the quarter with backlog 27% higher than the prior year period and is expected to continue to grow. Home Meridian has also launched a new division, HMidea, which will offer better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers. HMidea’s initial launch was well received at the October High Point Furniture Market and the line is expected continue to grow even in the coming months.
Percentage-wise, sales in Hooker Branded and All Other were down in the mid-to-low single digits, respectively, and gross profits and operating income improved compared to the prior year third quarter as a percentage of net sales. The impact of 25% tariffs on imported furniture from China enacted this summer has generally resulted in a 10% price increase on the portion of the Company’s product line imported from China in the Hooker Branded segment, suppressing retail demand. In total, given the challengingcurrent muted retail environment, andwhich has proven the continued impactvalue of tariffs, we were gratified to improve profitability performance in the Hooker Branded segment and All Other. The Hooker Branded Segment achieved a 190-basis-point improvement in operating income margin, and All Other achieved a 390-basis-point improvement compared to prior year third quarter.
The Hooker Branded segment’s net sales decreased $2.8$12.4 million or 6.0%31.4% in the fiscal 2020 third2021 first quarter, driven by reduced demand. The majority of this segment’s customers are traditional furniture stores and small or regional chains, most of which were closed since late March, leading to nearly 30% incoming order decline in the segment. Despite the sales decline, this segment was still highly profitable with a 29.5% gross margin and a 4.9% operating income margin during the quarter, which we believe to be excellent performance under current economic conditions.
The Home Meridian segment’s net sales decreased $10.0 million or 14.7% in the fiscal 2021 first quarter due primarily to lower sales volume due to the COVID-19 pandemic. Current economic factors, such as high unemployment and low consumer confidence, have resulted in a net salesweak retail environment for home furnishings and caused discretionary purchases of furniture to decline. Consequently, Home Meridian experienced a spike in order cancellations in March and April, which resulted in nearly 50% decrease in the Hooker Casegoods division, partially offset by a net sales increase at Hooker Upholstery. Hooker Casegoods experienced reduced incoming orders and 25.3% decrease in backlog compared to the prior year first quarter. In addition to the aforementioned intangible asset impairment charges recorded in this segment of $27.9 million and sales decline, lower margin sales volume driven by lower consumer demandprograms, promotion expenses and softnessunexpected chargebacks also contributed to the $30.3 million operating loss. On a more positive note, we believe the cost-related issues which negatively impacted Home Meridian’s sales and profitability in the home furnishings industry. Volume loss was partially mitigatedprior year, such as excess tariffs and higher than expected quality allowances, are largely behind us. The resourcing transition to non-tariff countries is well along. Samuel Lawrence Furniture benefited from the Vietnam mixing warehouse program and reported a marginally profitable quarter. Home Meridian’s emerging distribution channels, including ecommerce and hospitality, had solid performance during the quarter. Samuel Lawrence Hospitality’s net sales increased by higher average selling prices22.6% as we adjusted pricing to mitigate increased product costs and excess tariffs. Hooker Upholsterylarge projects were already in the pipeline at year-end. E-commerce sales, which were less impacted by retail shutdowns during the COVID-19 pandemic, continued to grow at a steady pace and accounted for 35% of Home Meridian’s total sales in the quarter, while maintaining better margins compared to the other Home Meridian channels.
The Domestic Upholstery segment’s net sales and gross profit, bothdecreased by $8.5 million or 33.7% in the double digits, duefiscal 2021 first quarter driven by decreased sales volume and lower average selling prices. The segment experienced a 40% decrease in incoming orders as compared to broader product offeringsthe same period from the prior year. In response to those reduced orders, we temporarily closed our manufacturing plants at Bradington-Young and favorableShenandoah for about a month during the quarter, and Sam Moore operated at about 50% capacity during that period. Reduced order volume and unabsorbed indirect costs contributed to operating inefficiencies and significantly impacted gross margin in this segment.
All Other’s net sales were essentially flat; however, it reported $387,000 in operating income in the fiscal 2021 first quarter driven by solid H Contract performance, with a 16% increase in incoming orders and 68% higher backlog compared to the prior year first quarter. Despite unfavorable product mix with more higher-priced sofas and sectionals sold. Hooker Upholstery’s incoming orders increased over 10% compared tohaving a modest adverse impact on gross margin, H Contract margins remained strong. Lifestyle Brands, a new business started in fiscal 2019, thirdalso reported a profit for the quarter.
Our sourcing transitions to non-tariff countries are on schedule. Company-wide,To address the financial impact of COVID-19 pandemic, during the fiscal 2021 first quarter we expectimplemented certain measures to reduce operating expenses and preserve cash which included temporary fee reductions for our Board of Directors, temporary salary reductions for officers and certain other managers, strategic staff reductions, the portiontemporary closure of our overall product line imported from China from about 40% atdomestic manufacturing plants and the endfurlough of manufacturing, warehouse and administrative associates, delaying all non-critical capital spending, rationalizing current import purchase orders, working with our most recent fiscal yearvendors to approximately 22% by this fiscal year end, with further progress expected in fiscal 2021.cut costs and extend payment terms where we could.
Net sales in All Other decreased $1.3 million or 4.3% inDespite the fiscal 2020 third quarter due to sales declines at Bradington –Young and Sam Moore, driven by decreased incoming orders, partially offset by continued strong sales in H Contract division and a lower-single digit sales increase at Shenandoah. Despite net sales declines, three out of four divisions improved gross margin in the third quarter, benefiting from lower material costs and better cost containment, partially offset by operating inefficiencies and higher direct labor due to lower production volume in the third quarter. However, favorable material costs have leveled out and we do not expect additional decreases in the near future. H Contract incoming orders increased over 15% in the third quarter and finishedloss for the quarter, with backlog over 20% higher than the prior year quarter end. Broader product offerings and favorable product mix with heavier weighting of imported casegoods significantly improved H Contract net sales and profitability. All Other reported a solid operating income margin of 9.6% and 8.7% for the fiscal 2020 third quarter and year to date, respectively.
Cash and cash equivalents increased $13.1 million to $24.5 million compared to $11.4 million at fiscal 2019 year-end, principally due to customer deposits in Home Meridian’s hospitality division and the collection of accounts receivable. Despite disappointing operating results thus far in fiscal 2020, we generated $26.6$18.9 million in cash from operating activities, received $673,000 life insurance proceeds, paid $2.2 million in principal and $1.4 million from proceeds receivedinterest on a note receivable from the sale of a former distribution facility. In addition, we paid $5.3our term loans, and distributed $1.9 million in cash dividends to our shareholders, $4.7shareholders. Cash and cash equivalents stood at $51.2 million for capital expenditures to expand our manufacturing facilities, and $4.4at fiscal 2021 first quarter-end, an increase of $15.2 million towards our term loans. Our total assets and liabilities as of November 3, 2019 each increased approximately $41 million duecompared to the adoption of Topic 842, Leases on the first day of the current fiscal year. We are working to reduce excess inventory and exited one of the temporary warehouses early in thebalance at fiscal 2020 fourth quarter. With strategic inventory management and cautious capital expenditures, alongyear-end.
Along with an aggregate $25.7 million available under our existing revolving credit facilityrevolver to fund working capital, we are confident in our financial condition going forward.and we believe we have financial resources to weather the expected short-term impacts of COVID-19; however, an extended impact may continue to 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 included in the condensed consolidated statements of income included in this report.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||
November 3, | October 28, | November 3, | October 28, | May 3, | May 5, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Cost of sales | 82.0 | 79.1 | 81.4 | 78.5 | 82.2 | 81.2 | ||||||||||||||||||
Casualty loss | - | - | - | 0.1 | ||||||||||||||||||||
Total cost of sales | 82.0 | 79.1 | 81.4 | 78.6 | ||||||||||||||||||||
Gross profit | 18.0 | 20.9 | 18.6 | 21.4 | 17.8 | 18.8 | ||||||||||||||||||
Selling and administrative expenses | 14.4 | 13.4 | 15.1 | 14.1 | 18.3 | 16.2 | ||||||||||||||||||
Goodwill impairment charges | 37.8 | - | ||||||||||||||||||||||
Trade name impairment charges | 4.6 | - | ||||||||||||||||||||||
Intangible asset amortization | 0.4 | 0.3 | 0.4 | 0.4 | 0.6 | 0.4 | ||||||||||||||||||
Operating income | 3.2 | 7.2 | 3.1 | 6.9 | ||||||||||||||||||||
Other income, net | 0.2 | 0.1 | - | 0.1 | ||||||||||||||||||||
Operating (loss)/income | (43.4 | ) | 2.1 | |||||||||||||||||||||
Interest expense, net | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.3 | ||||||||||||||||||
Income before income taxes | 3.2 | 7.1 | 2.9 | 6.8 | ||||||||||||||||||||
(Loss)/income before income taxes | (43.7 | ) | 1.8 | |||||||||||||||||||||
Income tax expense | 0.7 | 1.6 | 0.6 | 1.6 | (10.4 | ) | 0.4 | |||||||||||||||||
Net income | 2.5 | 5.4 | 2.3 | 5.2 | ||||||||||||||||||||
Net (loss)/income | (33.3 | ) | 1.5 |
Fiscal 2020 Third2021 First Quarter Compared to Fiscal 201209 Third20 Quarter First Quarter
Net Sales | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 43,703 | 27.6 | % | $ | 46,479 | 27.1 | % | $ | (2,776 | ) | -6.0 | % | |||||||||||
Home Meridian | 85,776 | 54.3 | % | 95,013 | 55.4 | % | (9,237 | ) | -9.7 | % | ||||||||||||||
All Other | 28,697 | 18.1 | % | 29,982 | 17.5 | % | (1,285 | ) | -4.3 | % | ||||||||||||||
Consolidated | $ | 158,176 | 100 | % | $ | 171,474 | 100 | % | $ | (13,298 | ) | -7.8 | % |
Fiscal 2020 results have been recast based on the re-composition of our reportable segments during the fiscal 2020 fourth quarter. See Note 13 Segment Information for additional details regarding the re-composition of our operating segments.
Unit Volume | FY20 Q3 % Increase vs. FY19 Q3 | Average Selling Price (ASP) | FY20 Q3 % Increase vs. FY19 Q3 | |||||||||||||||||||||||||||||||
Net Sales | ||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||
Hooker Branded | -21.1 | % | Hooker Branded | 19.7 | % | $ | 27,162 | 26.0 | % | $ | 39,600 | 29.2 | % | $ | (12,438 | ) | -31.4 | % | ||||||||||||||||
Home Meridian | -4.7 | % | Home Meridian | -1.7 | % | 57,665 | 55.1 | % | 67,630 | 49.9 | % | (9,965 | ) | -14.7 | % | |||||||||||||||||||
Domestic Upholstery | 16,783 | 16.0 | % | 25,324 | 18.7 | % | (8,541 | ) | -33.7 | % | ||||||||||||||||||||||||
All Other | -11.2 | % | All Other | 6.7 | % | 2,987 | 2.9 | % | 2,964 | 2.2 | % | 23 | 0.8 | % | ||||||||||||||||||||
Consolidated | -7.5 | % | Consolidated | 1.7 | % | $ | 104,597 | 100 | % | $ | 135,518 | 100 | % | $ | (30,921 | ) | -22.8 | % |
Unit Volume | FY21 Q1 % Increase vs. FY20 Q1 | Average Selling Price (ASP) | FY21 Q1 % Increase vs. FY20 Q1 | |||||||
Hooker Branded | -35.3 | % | Hooker Branded | 5.6 | % | |||||
Home Meridian | -18.3 | % | Home Meridian | 3.3 | % | |||||
Domestic Upholstery | -31.0 | % | Domestic Upholstery | -4.4 | % | |||||
All Other | -5.1 | % | All Other | 1.8 | % | |||||
Consolidated | -21.6 | % | Consolidated | -2.1 | % |
Consolidated net sales decreased primarily due to significantly reduced sales declinevolume in all three reportable segments versus the Home Meridian segment and to a lesser extent in the Hooker Branded segment and All Other.prior year period.
■ | The net sales decrease in the Hooker Branded segment was |
■ | Net sales decreased in |
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Gross Income and Margin | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 13,947 | 31.9 | % | $ | 14,334 | 30.8 | % | $ | (387 | ) | -2.7 | % | |||||||||||
Home Meridian | 7,286 | 8.5 | % | 15,382 | 16.2 | % | (8,096 | ) | -52.6 | % | ||||||||||||||
All Other | 7,166 | 25.0 | % | 6,120 | 20.4 | % | 1,046 | 17.1 | % | |||||||||||||||
Consolidated | $ | 28,399 | 18.0 | % | $ | 35,836 | 20.9 | % | $ | (7,437 | ) | -20.8 | % |
■ | All Other net sales increased slightly due to the addition of Lifestyle Brands sales and increased H Contract ASP, partially offset by H Contract decreased unit volume. |
Gross Income and Margin | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 8,005 | 29.5 | % | $ | 12,556 | 31.7 | % | $ | (4,551 | ) | -36.2 | % | |||||||||||
Home Meridian | 6,809 | 11.8 | % | 5,903 | 8.7 | % | 906 | 15.3 | % | |||||||||||||||
Domestic Upholstery | 2,783 | 16.6 | % | 6,002 | 23.7 | % | (3,219 | ) | -53.6 | % | ||||||||||||||
All Other | 1,056 | 35.4 | % | 1,056 | 35.6 | % | - | 0.0 | % | |||||||||||||||
Consolidated | $ | 18,653 | 17.8 | % | $ | 25,517 | 18.8 | % | $ | (6,864 | ) | -26.9 | % |
Consolidated gross profit decreased in absolute terms and as a percentage of net sales in the fiscal 2020 third quarter.
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Selling and Administrative Expenses (S&A) | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 7,760 | 17.8 | % | $ | 8,623 | 18.6 | % | $ | (863 | ) | -10.0 | % | |||||||||||
Home Meridian | 10,907 | 12.7 | % | 10,219 | 10.8 | % | 688 | 6.7 | % | |||||||||||||||
All Other | 4,143 | 14.4 | % | 4,137 | 13.8 | % | 6 | 0.1 | % | |||||||||||||||
Consolidated | $ | 22,810 | 14.4 | % | $ | 22,979 | 13.4 | % | $ | (169 | ) | -0.7 | % |
Consolidated S&A expenses decreased in absolute terms but increased as a percentage of net sales in the fiscal 2020 third quarter.
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Intangible Asset Amortization | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 596 | 0.4 | % | $ | 596 | 0.3 | % | $ | - | 0.0 | % |
Intangible asset amortization expense stayed the same compared to2021 first quarter versus the prior year third quarter.
Operating Profit (Loss) and Margin | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 6,188 | 14.2 | % | $ | 5,712 | 12.3 | % | $ | 476 | 8.3 | % | ||||||||||||
Home Meridian | (3,955 | ) | -4.6 | % | 4,829 | 5.1 | % | (8,784 | ) | -181.9 | % | |||||||||||||
All Other | 2,760 | 9.6 | % | 1,720 | 5.7 | % | 1,040 | 60.5 | % | |||||||||||||||
Consolidated | $ | 4,993 | 3.2 | % | $ | 12,261 | 7.2 | % | $ | (7,268 | ) | -59.3 | % |
Operating profitability decreased in absolute terms and as a percentage of net sales, due to the factors discussed above.
Interest Expense, net | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 316 | 0.2 | % | $ | 354 | 0.2 | % | $ | (38 | ) | -10.7 | % |
Consolidated interest expense decreased due to lower average loan balances, partially offset by increased interest rates on our variable-rate term loans.
Income taxes | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated income tax expense | $ | 1,066 | 0.7 | % | $ | 2,775 | 1.6 | % | $ | (1,709 | ) | -61.6 | % | |||||||||||
Effective Tax Rate | 21.4 | % | 22.9 | % |
We recorded income tax expense of $1.1 million for the fiscal 2020 third quarter compared to $2.8 million for the comparable prior year period. The effective tax rates for the fiscal 2020 and 2019 third quarters were 21.4% and 22.9%, respectively.
Net Income | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
Net Income | % Net Sales | % Net Sales | ||||||||||||||||||||||
Consolidated | $ | 3,920 | 2.5 | % | $ | 9,332 | 5.4 | % | $ | (5,412 | ) | -58.0 | % | |||||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.79 |
Fiscal 2020 First Nine Months Compared to Fiscal 2019 First Nine Months
Net Sales | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 122,707 | 27.5 | % | $ | 129,801 | 26.9 | % | $ | (7,094 | ) | -5.5 | % | |||||||||||
Home Meridian | 240,594 | 54.0 | % | 266,631 | 55.2 | % | (26,037 | ) | -9.8 | % | ||||||||||||||
All Other | 82,641 | 18.5 | % | 86,594 | 17.9 | % | (3,953 | ) | -4.6 | % | ||||||||||||||
Consolidated | $ | 445,942 | 100 | % | $ | 483,026 | 100 | % | $ | (37,084 | ) | -7.7 | % |
Unit Volume | FY20 YTD % Increase vs. FY19 YTD | Average Selling Price (ASP) | FY20 YTD % Increase vs. FY19 YTD | |||||||
Hooker Branded | -14.0 | % | Hooker Branded | 10.5 | % | |||||
Home Meridian | -9.4 | % | Home Meridian | 1.1 | % | |||||
All Other | -9.8 | % | All Other | 5.5 | % | |||||
Consolidated | -10.0 | % | Consolidated | 3.5 | % |
Consolidated net sales decrease was driven by net sales decline in the Home Meridian segment, and to a lesser extent in the Hooker Branded segment and All Other. Incoming orders declined primarily due to the soft retail environment, especially earlier in the fiscal year.
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Gross Income and Margin | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 38,323 | 31.2 | % | $ | 41,372 | 31.9 | % | $ | (3,049 | ) | -7.4 | % | |||||||||||
Home Meridian | 24,139 | 10.0 | % | 43,196 | 16.2 | % | (19,057 | ) | -44.1 | % | ||||||||||||||
All Other | 20,279 | 24.5 | % | 18,879 | 21.8 | % | 1,400 | 7.4 | % | |||||||||||||||
Consolidated | $ | 82,741 | 18.6 | % | $ | 103,447 | 21.4 | % | $ | (20,706 | ) | -20.0 | % |
Consolidated gross profit decreased in absolute terms and as a percentage of net sales in the fiscal 2020 first nine months.
■ | The Hooker Branded segment’s gross profit decreased $4.6 million due primarily to the net sales decline. Gross margin decreased from 31.7% to 29.5% due to the increase of fixed expenses as a percentage of net sales on lower net |
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■ | Domestic Upholstery segment’s gross |
■ | All Other’s gross profit |
Selling and Administrative Expenses (S&A) | Selling and Administrative Expenses (S&A) | |||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 22,870 | 18.6 | % | $ | 23,992 | 18.5 | % | $ | (1,122 | ) | -4.7 | % | $ | 6,672 | 24.6 | % | $ | 7,379 | 18.6 | % | $ | (707 | ) | -9.6 | % | ||||||||||||||||||||||
Home Meridian | 32,152 | 13.4 | % | 32,027 | 12.0 | % | 125 | 0.4 | % | 8,886 | 15.4 | % | 10,562 | 15.6 | % | (1,676 | ) | -15.9 | % | |||||||||||||||||||||||||||||
Domestic Upholstery | 2,949 | 17.6 | % | 3,447 | 13.6 | % | (498 | ) | -14.4 | % | ||||||||||||||||||||||||||||||||||||||
All Other | 12,264 | 14.8 | % | 12,131 | 14.0 | % | 133 | 1.1 | % | 670 | 22.4 | % | 628 | 21.2 | % | 42 | 6.7 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 67,286 | 15.1 | % | $ | 68,150 | 14.1 | % | $ | (864 | ) | -1.3 | % | $ | 19,177 | 18.3 | % | $ | 22,016 | 16.2 | % | $ | (2,839 | ) | -12.9 | % |
Consolidated selling and administrative (“S&A&A”) expenses decreased in absolute terms butwhile increased as a percentage of net sales in the fiscal 20202021 first nine months.quarter versus the prior year period.
■ | The Hooker Branded |
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■ | The Home Meridian segment’s S&A expenses decreased in absolute terms while staying relatively flat as a percentage of net sales. The decrease was principally attributable to lower selling expenses due to net sales, and to a lesser extent spending reductions, decreased travel and professional service expenses which were higher in the prior year period due to the resourcing transition. These expenses decreased in the current period as the resourcing transition was in its final stages and business travel was also limited due to COVID-19 pandemic. |
■ | The Domestic Upholstery segment’s S&A expenses decreased in absolute terms due to decreased selling expenses on lower net sales, partially offset by higher medical claim costs. |
■ | All Other S&A expenses increased slightly in absolute terms and as a percentage of net sales due to |
Intangible Asset Amortization | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 1,788 | 0.4 | % | $ | 1,788 | 0.4 | % | $ | - | 0.0 | % |
Goodwill impairment charges | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Home Meridian | $ | 23,187 | 40.2 | % | $ | - | 0.0 | % | $ | 23,187 | ||||||||||||||
Domestic Upholstery | 16,381 | 97.6 | % | - | 0.0 | % | 16,381 | |||||||||||||||||
Consolidated | 39,568 | 37.8 | % | - | 39,568 |
Trade name impairment charges | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Home Meridian | $ | 4,750 | 8.2 | % | $ | - | $ | 4,750 | ||||||||||||||||
Consolidated | $ | 4,750 | 4.6 | % | $ | - | 4,750 |
We recorded $23.2 million and $16.4 million in non-cash impairment charges to write down goodwill in Home Meridian segment and the Shenandoah division under Domestic Upholstery segment, respectively. We also recorded $4.8 million non-cash impairment charges to write down tradenames in the Home Meridian segment.
Intangible Asset Amortization | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 596 | 0.6 | % | $ | 596 | 0.4 | % | $ | - | 0.0 | % |
Intangible asset amortization expense stayed the same compared to the prior year nine-month period.first quarter.
Operating Profit (Loss) and Margin | Operating (Loss)/Profit and Margin | ||||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | May 3, 2020 | May 5, 2019 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | ||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 15,453 | 12.6 | % | $ | 17,381 | 13.4 | % | $ | (1,928 | ) | -11.1 | % | $ | 1,333 | 4.9 | % | $ | 5,177 | 13.1 | % | $ | (3,844 | ) | -74.3 | % | |||||||||||||||||||||||
Home Meridian | (9,013 | ) | -3.7 | % | 10,168 | 3.8 | % | (19,181 | ) | -188.6 | % | (30,348 | ) | -52.6 | % | (4,993 | ) | -7.4 | % | (25,355 | ) | -507.8 | % | ||||||||||||||||||||||||||
Domestic Upholstery | (16,810 | ) | -100.2 | % | 2,292 | 9.1 | % | (19,102 | ) | 833.4 | % | ||||||||||||||||||||||||||||||||||||||
All Other | 7,227 | 8.7 | % | 5,960 | 6.9 | % | 1,267 | 21.3 | % | 387 | 12.9 | % | 429 | 14.5 | % | (42 | ) | -9.8 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 13,667 | 3.1 | % | $ | 33,509 | 6.9 | % | $ | (19,842 | ) | -59.2 | % | $ | (45,438 | ) | -43.4 | % | $ | 2,905 | 2.1 | % | $ | (48,343 | ) | -1664.1 | % |
Operating profitability decreased in absolute terms and as a percentage of net sales, in fiscal 2020 first nine months, due to the factors discussed above.
Interest Expense, net | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 986 | 0.2 | % | $ | 1,099 | 0.2 | % | $ | (113 | ) | -10.3 | % |
Interest Expense, net | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 208 | 0.2 | % | $ | 341 | 0.3 | % | $ | (133 | ) | -39.0 | % |
Consolidated interest expense decreased in fiscal 2021 first quarter primarily due to loan balances, partially offset by increasedlower interest rates on our variable-rate term loans.loans, as well as lower principal balances.
Income taxes | Income taxes | |||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Consolidated income tax expense | $ | 2,829 | 0.6 | % | $ | 7,504 | 1.6 | % | $ | (4,675 | ) | -62.3 | % | |||||||||||||||||||||||||||||||||||
Consolidated income tax (benefit)/expense | $ | (10,869 | ) | -10.4 | % | $ | 515 | 0.4 | % | $ | (11,384 | ) | -2210.5 | % | ||||||||||||||||||||||||||||||||||
Effective Tax Rate | 21.9 | % | 23.0 | % | 23.8 | % | 20.6 | % |
We recorded income tax expensebenefit of $2.8$10.9 million for the fiscal 20202021 first nine monthsquarter, of which income tax benefit of $10.6 million was recorded related to goodwill and trade name impairment charges, compared to $7.5 million$515,000 income tax expense for the comparable prior year period. The effective tax rates for the fiscal 2021 and 2020 first quarters were 23.8% and 2019 first nine months were 21.9% and 23.0%20.6%, respectively.
Net Income | Net (Loss)/Income | |||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | May 3, 2020 | May 5, 2019 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||
Net (loss) / income | % Net Sales | % Net Sales | ||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 10,067 | 2.3 | % | $ | 25,181 | 5.2 | % | $ | (15,114 | ) | -60.0 | % | $ | (34,819 | ) | -33.3 | % | $ | 1,987 | 1.5 | % | $ | (36,806 | ) | -1852.3 | % | |||||||||||||||||||||
Diluted earnings per share | $ | 0.85 | $ | 2.13 | ||||||||||||||||||||||||||||||||||||||||||||
Diluted (loss) / earnings per share | $ | (2.95 | ) | $ | 0.17 |
Outlook
The COVID-19 crisis drove the most significant downturn in our business in over 50 years. However, the disruption has not been as severe as we initially projected. Based on the improvement in orders and retail sales we’ve seen since the end of the fiscal 2021 first quarter, as stores and the economy continue to reopen, we are cautiously optimistic that the worst is behind us and that business will steadily improve through the summer and fall. We believe the Company remains in exceptional financial condition with a strong balance sheet and barring a second nationwide or large-scale lock-down, we expect business to improve each quarter as we go through the year. However, we have limited visibility of how the economic and health crises may fluctuate in the coming months and face headwinds of significant levels of unemployment, recent social unrest and general uncertainty.
After beginning the current fiscal year on an upturn with an 8.3% year-over-year increase in consolidated incoming orders in February, orders plummeted over 70% year-over-year in March and approximately 65% year-over-year in April partially driven by cancellations of stock orders by large customers and deferred orders from retailers who closed their stores during the shutdown. Orders declined significantly during the first few weeks of May but then recovered resulting in about a 5% overall reduction for the full month of May compared to the prior year. Fiscal June and to-date July orders have continued this positive trend with fiscal June orders and orders thus far in July at higher rate than the comparable month a year ago. We believe there are several positive factors in play such as pent-up demand, more focus on home environments and less competition for discretionary consumer spending from travel, dining out, sporting events, concerts and other activities.
In addition, Hooker’s domestic upholstery manufacturing facilities for Bradington-Young, Sam Moore and Shenandoah began ramping up production in early May and are currently operating near capacity on a consolidated basis, which is a significant increase over the fiscal 2021 first quarter, which will improve efficiencies and cost absorption.
As of the end of our fiscal 2021 first quarter of May 3, 2020, our cash position was $51.2 million, an increase of $15.2 million over the end of the 2020 fiscal year on February 2, 2020. Since the end of the fiscal 2021 first quarter on May 3, 2020, we added an additional $31.0 million in cash to the quarter-end balance as of the date of July 23, 2020. Additionally, we have access to about $26 million under our existing revolver to fund working capital requirements and have access to an additional $25.6 million in cash surrender value of Company-owned life insurance policies. While we expect our cash balances to decline somewhat as we rebuild inventories and trade receivables increase- both to accommodate increased sales- we expect our liquidity to be sufficient. Discussions with our lender to refinance our credit facility which expires in February 2021 have begun and we expect to be successful in refinancing our debt; however, we believe we have sufficient financial resources to continue to operate even without refinancing our debt. We expect to continue managing cash and spending cautiously as we move through the coming months.
We face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors” in our 20192020 Annual Report.
Compared to the fiscal 2020 second quarter, consolidated orders increased by about $8 million or 5% in the fiscal 2020 third quarter. However, compared to the same period a year ago, consolidated orders dipped approximately $15 million or about 8%. The decline in orders from the one large Home Meridian segment customer is a significant part of that reduction, along with the subdued demand resulting from increased prices due to tariffs. While some retail components of the home furnishings industry like large national chains, club stores, international sales and full-line furniture independent retailers are sluggish, sales performance in other channels such as e-commerce, hospitality, contract furniture and interior design are up.
On a consolidated basis, we expect earnings to improve on a sequential basis next quarter. We believe the earnings performance momentum we have in the Hooker Branded segment and in All Other will continue, and for the Home Meridian segment earnings to improve significantly from the third quarter of fiscal 2020 despite the reduced volume from the single large customer.
However, there are two calendar dynamics that will impact our performance in the fourth quarter of fiscal 2020. First, last year was a 53-week leap year, so Company-wide we will have one less week of shipments this year. In addition to this lost week of shipping, the Chinese and Vietnamese New Year holiday vacations are earlier, which will result in an additional five to ten fewer shipping days this fiscal year for our container direct customers.
We remain highly engaged as a management team in strategic planning and continue to benefit from having a diverse portfolio of 11 operating units across many different distribution channels, price points and products. We are addressing our long-term and short-term challenges and have active strategies in place to expand our business beyond the current product line and customer base. We remain confident in our business model, market position and strategies and believe we will adapt successfully to the challenges posed by the current business climate.
Financial Condition, Liquidity and Capital Resources
Cash Flows – Operating, Investing and Financing Activities
Thirty-Nine Weeks Ended | ||||||||
November 3, | October 28, | |||||||
2019 | 2018 | |||||||
Net cash provided by operating activities | $ | 26,610 | $ | 20,919 | ||||
Net cash used in investing activities | (3,838 | ) | (1,760 | ) | ||||
Net cash used in financing activities | (9,709 | ) | (20,625 | ) | ||||
Net increase/(decrease) in cash and cash equivalents | $ | 13,063 | $ | (1,466 | ) |
Thirteen Weeks Ended | ||||||||
May 3, | May 5, | |||||||
2020 | 2019 | |||||||
Net cash provided by operating activities | $ | 18,924 | $ | 20,286 | ||||
Net cash provided by/(used in) investing activities | 131 | (235 | ) | |||||
Cash used in financing activities | (3,846 | ) | (3,232 | ) | ||||
Net increase in cash and cash equivalents | $ | 15,209 | $ | 16,819 |
During the ninethree months ended NovemberMay 3, 2019,2020, we used somea portion of the $26.6$18.9 million of cash generated from operations and $673,000 life insurance proceeds to pay $2.2 million in principal and interest payments on our term loans, $1.9 million in cash dividends, and $162,000 in life insurance premiums on Company-owned life insurance policies.
In comparison, during the three months ended May 5, 2019, cash generated from operations of $20.3 million and $1.4 million of proceeds on a note receivable helped to pay for $5.3$1.8 million in cash dividends, $4.7$1.5 million in long-term debt payments, $1.5 million of capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities, $4.4 million in long-term debt payments, and $558,000 in life insurance premiums.
In comparison, during the nine months ended October 28, 2018, cash generated from operations of $20.9 million (despite a $3.0 million contribution to our Pension Plan) and $1.2 million in proceeds received under Company-owned life insurance policies helped to pay $15.7 million in long-term debt payments, $4.9 million in cash dividends, $2.5 million of capital expenditures to enhance our business systems and facilities, and $620,000$157,000 in life insurance premiums.
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; |
■ | available lines of |
■ | 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 |
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■ | the servicing of our acquisition-related debt. |
Loan Agreements 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. 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 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 bears 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 amount borrowed under the Secured Term Loan bears 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:
■ | amends and restates 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”), which we subsequently paid off in full. |
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. |
o | A basic fixed charge coverage ratio of at least 1.25:1.00; and |
o | 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 paid off the New Unsecured Term Loan in fiscal 2019.
We were in compliance with each of these financial covenants at NovemberMay 3, 20192020 and expect to remain in compliance with existing covenants for the foreseeable future. We believe we have the 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.
As of NovemberMay 3, 2019, $14.02020, $11.1 million was outstanding under the Unsecured Term Loan, $17.1 million was outstanding under the Secured Term Loan, respectively. We expect to refinance any outstanding balances due under these term loans prior to their due dates of February 1, 2021.Loan.
Revolving Credit Facility Availability
As of NovemberMay 3, 2019,2020, we had an aggregate $25.7 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of NovemberMay 3, 2019.2020. There were no additional borrowings outstanding under the revolving credit facility as of NovemberMay 3, 2019.2020.
Expected Refinancing in Fiscal 2021
All amounts outstanding on our term loans and revolving credit facility are due and payable on the first day of fiscal 2022, February 1, 2021 and discussions with our lender about refinancing have begun. 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 or the availability of loans may be limited and refinancing our debt may be more difficult and loans more costly.
Capital Expenditures
We spent $4.7Prior to the COVID-19 crisis, we expected to spend between $2.5 million forto $4.5 million in capital expenditures duringin fiscal 2020 first nine months, $3.32021 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 of which was spent on the expansion of our Bradington-Young manufacturing facility.in non-critical capital spending. We expect to spend minimal amounts duringbetween $1.0 to $2.0 million in the remainder of the 2021 fiscal 2020year to maintain and continue to enhance our operating systems and facilities.
Share Repurchase AuthorizationCOVID-19 Cost Cutting and Cash Preservation Measures
During the fiscal 2013,2021 first quarter, we initiated certain measures to reduce operating expenses and preserve cash which include temporary fee reductions for our Board of Directors, authorizedtemporary salary reductions for officers and certain other managers, strategic staff reductions, the repurchase of up to $12.5 million of shares of the Company’s common stock. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended or discontinued at any time at the discretiontemporary closure of our Boarddomestic manufacturing plants and the furlough of Directors. Repurchases may be made from timemanufacturing, warehouse and administrative associates, delaying all non-critical capital spending, rationalizing current import purchase orders, working with our vendors to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rulescut costs and regulations, and subject to our cash requirements for other purposes, compliance with the covenants under the Loan Agreement and other factorsextend payment terms where we deem relevant. No shares have been repurchased since fiscal 2013. Approximately $11.8 million remained available for future repurchases under the authorization as of November 3, 2019.
Commitments and Contractual Obligationscan.
As of Novemberthe end of our fiscal 2021 first quarter of May 3, 2019,2020, our commitments and contractual obligations related to our operating leases werecash position had increased by $15.2 million over the end of the 2020 fiscal year on February 2, 2020. Since the end of the fiscal 2021 first quarter on May 3, 2020, we added an additional $31 million in cash as follows:of July 23, 2020.
Cash Payments Due by Period (In thousands) | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
1 Year | 1-3 Years | 3-5 Years | 5 years | Total | ||||||||||||||||
Operating leases* | 2,516 | 20,366 | 10,507 | 15,155 | 48,544 |
Dividends
*These amounts represent estimatedSubsequent to the end of the fiscal 2021 first quarter on June 2, 2020, our board of directors declared a quarterly cash payments duedividend of $0.16 per share, which was paid on June 30, 2020 to shareholders of record at June 16, 2020. We have seen steady improvement in orders and shipments since the end of our fiscal 2021 first quarter on May 3, 2020. We expect our low fixed cost business model, which served us well during the Great Recession, to help us navigate the current disruption. Our cash position has remained strong and has continued to improve since our fiscal year-end in early February, with additional availability under operating leases for real estate utilizedour revolving credit facility if needed. Consequently, while we are confident in our operationsfuture and warehouse and office equipment, as well as short term leases with remaining terms less than 12 months. See Note 9 for additional information and disclosures aboutare proud of our leases.
Recently Issued Accounting Standards
In June 2016,fifty-plus year history of consistently paying dividends, we have limited visibility into future economic conditions. The Board will continue to evaluate 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. The amendments will be applied through a cumulative-effect adjustment to retained earnings asappropriateness of the beginning of the first reporting periodcurrent dividend rate considering our performance and economic conditions in which guidance is effective, which is a modified-retrospective approach. We are presently completing our analysis of the effects of adopting this standard on our consolidated financial statements and results of operations. Based on our analysis to-date, we do not believe the adoption of this standard will have a material effect on our consolidated financial statements or results of operations.future quarters.
Critical Accounting Policies
Except as discussed below, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 20192020 Annual Report.
On the first day of the current fiscal year, we adopted the accounting standardstandards outlined in Part 1, Notes to Condensed Consolidated Financial Statements, “Note 2. Recently Adopted Accounting Policies” (“Note 2”). See Note 2 for additional information related to the impact of adopting this accounting standard.
Item 3. 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
Borrowings under our 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 NovemberMay 3, 2019,2020, other than standby letters of credit in the amount of $4.3 million; however, as of NovemberMay 3, 2019, $31.12020, $28.2 million was outstanding under our term loans. A 1% increase in the LIBOR rate would result in an annual increase in interest expenses on our terms loans of approximately $284,000.$197,000.
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 4. 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 NovemberMay 3, 2019.2020. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of NovemberMay 3, 20192020 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 SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal quarter ended NovemberMay 3, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
3.1 |
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3.2 |
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4.1 |
| Amended and Restated Articles of Incorporation of the Company, as amended (See Exhibit 3.1) |
4.2 |
| Amended and Restated Bylaws of the Company, as amended (See Exhibit 3.2) |
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| Rule 13a-14(a) Certification of the Company’s principal executive officer | |
31.2* |
| Rule 13a-14(a) Certification of the Company’s principal financial officer |
32.1** |
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101* |
| The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended |
*Filed herewith
** Furnished herewith
Pursuant to the requirements 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 |
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Date: | By: | /s/ Paul A. Huckfeldt |
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| Paul A. Huckfeldt |
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| Chief Financial Officer and Senior Vice President – Finance and Accounting |
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