hookerfurn20180830_10q.htm

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 July 29, 2018

 

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)

 

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 filer ☒

Non-accelerated Filer ☐ (Do not check if a smaller reporting company)

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 ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 31, 2018:

 

Common stock, no par value

11,785,147

(Class of common stock)

(Number of shares)

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

3

 

 

 

Item 2.

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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

33

 

 

 

Signature

34

 

  

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

As of

 

July 29,

   

January 28,

 
   

2018

   

2018

 
   

(unaudited)

         

Assets

               

Current assets

               

    Cash and cash equivalents

  $ 29,231     $ 30,915  

    Trade accounts receivable, net

    83,584       92,461  

    Inventories

    98,465       84,459  

    Prepaid expenses and other current assets

    6,137       5,314  

         Total current assets

    217,417       213,149  

Property, plant and equipment, net

    27,647       29,249  

Cash surrender value of life insurance policies

    23,229       23,622  

Deferred taxes

    2,494       3,264  

Intangible assets, net

    36,947       38,139  

Goodwill

    40,058       40,058  

Other assets

    2,258       2,235  

         Total non-current assets

    132,633       136,567  

               Total assets

  $ 350,050     $ 349,716  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities

               

    Current portion of term loans

  $ 6,532     $ 7,528  

    Trade accounts payable

    36,987       32,685  

    Accrued salaries, wages and benefits

    7,557       9,218  

    Income tax accrual

    112       3,711  

    Customer deposits

    4,957       3,951  

    Other accrued expenses

    3,659       2,894  

         Total current liabilities

    59,804       59,987  

Long term debt

    33,031       45,778  

Deferred compensation

    11,343       11,164  

Pension plan

    2,366       2,441  

Other long-term liabilities

    963       886  

Total long-term liabilities

    47,703       60,269  

              Total liabilities

    107,507       120,256  
                 

Shareholders’ equity

               

Common stock, no par value, 20,000 shares authorized,

11,785 and 11,762 shares issued and outstanding on each date

    49,224       48,970  

    Retained earnings

    192,775       180,122  

    Accumulated other comprehensive income

    544       368  

              Total shareholders’ equity

    242,543       229,460  

                   Total liabilities and shareholders’ equity

  $ 350,050     $ 349,716  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

   

July 29,

   

July 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net sales

  $ 168,661     $ 156,308     $ 311,553     $ 287,180  
                                 

Cost of sales

    132,516       123,191       243,442       225,920  

Casualty loss

    500       -       500       -  

Total Cost of Sales

    133,016       123,191       243,942       225,920  
                                 

      Gross profit

    35,645       33,117       67,611       61,260  
                                 

Selling and administrative expenses

    23,184       20,858       45,171       41,428  

Intangible asset amortization

    596       333       1,192       667  
                                 

        Operating income

    11,865       11,926       21,248       19,165  
                                 

Other income, net

    73       368       77       460  

Interest expense, net

    364       282       745       533  
                                 

      Income before income taxes

    11,574       12,012       20,580       19,092  
                                 

Income tax expense

    2,881       4,234       4,730       6,568  
                                 

       Net income

  $ 8,693     $ 7,778     $ 15,850     $ 12,524  
                                 

Earnings per share

                         

       Basic

  $ 0.74     $ 0.67     $ 1.35     $ 1.08  

       Diluted

  $ 0.74     $ 0.67     $ 1.34     $ 1.08  
                                 

Weighted average shares outstanding:

                         

       Basic

    11,760       11,565       11,755       11,554  

       Diluted

    11,784       11,593       11,775       11,587  
                                 

Cash dividends declared per share

  $ 0.14     $ 0.12     $ 0.28     $ 0.24  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

 

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

   

July 29,

   

July 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net Income

  $ 8,693     $ 7,778     $ 15,850     $ 12,524  

       Other comprehensive income (loss):

                               

                 Amortization of actuarial gain

    43       15       86       31  

                 Income tax effect on amortization

    (10 )     (6 )     (21 )     (11 )

        Adjustments to net periodic benefit cost

    33       9       65       20  

 Reclassification of tax effects due to the

             adoption of ASU 2018-02 (see Note 2)

    -       -       111       -  
                                 

Total Comprehensive Income

  $ 8,726     $ 7,787     $ 16,026     $ 12,544  

 

 

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

 
   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

 
   

2018

   

2017

 

Operating Activities:

         

Net income

  $ 15,850     $ 12,524  

Adjustments to reconcile net income to net cash

provided by operating activities:

         

Depreciation and amortization

    3,689       2,697  

Gain on disposal of assets

    (48 )     (43 )

Deferred income tax expense

    748       1,234  

Noncash restricted stock and performance awards

    548       951  

(Benefit from)/provision for doubtful accounts and sales allowances

    (785 )     173  

Gain on life insurance policies

    (504 )     (478 )

Changes in assets and liabilities:

         

Trade accounts receivable

    10,633       17,034  

Inventories

    (14,584 )     (6,732 )

Prepaid expenses and other current assets

    (672 )     185  

Trade accounts payable

    4,281       (9,283 )

Accrued salaries, wages, and benefits

    (1,804 )     (1,559 )

Accrued income taxes

    (3,719 )     (3,371 )

Customer deposits

    1,007       388  

Other accrued expenses

    702       313  

Deferred compensation

    42       (355 )

Other long-term liabilities

    81       207  

              Net cash provided by operating activities

  $ 15,465     $ 13,885  
                 

Investing Activities:

         

Purchases of property and equipment

    (833 )     (1,665 )

Proceeds received on notes from sale of assets

    70       63  

Proceeds received on life insurance policies

    1,225       -  

Premiums paid on life insurance policies

    (529 )     (550 )

              Net cash used in investing activities

    (67 )     (2,152 )
                 

Financing Activities:

         

Payments for long-term debt

    (13,786 )     (2,929 )

Cash dividends paid

    (3,296 )     (2,778 )

              Net cash used in financing activities

    (17,082 )     (5,707 )
                 

Net (decrease)/increase in cash and cash equivalents

    (1,684 )     6,026  

Cash and cash equivalents - beginning of year

    30,915       39,792  

Cash and cash equivalents - end of quarter

  $ 29,231     $ 45,818  
                 

Supplemental disclosure of cash flow information:

         

Cash paid for income taxes

  $ 7,699     $ 8,705  

Cash paid for interest, net

    632       489  

Non-cash transactions:

         

Increase in property and equipment through accrued purchases

    20       50  

 

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 Twenty-Six Weeks Ended July 29, 2018

 

1.     Preparation of Interim Financial Statements

 

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, except as indicated in Note 2, below. 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 January 28, 2018 (“2018 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.

 

On September 29, 2017, we completed the previously disclosed acquisition of substantially all the assets of Shenandoah Furniture, Inc. (the “Shenandoah acquisition”). Thus, the Shenandoah acquisition closed during the third quarter of the 2018 fiscal year. Consequently, Shenandoah’s prior year results are not included in the results discussed in this quarterly report.

 

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,” “second quarter” or “quarterly period”) that began April 30, 2018, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began January 29, 2018, which both ended July 29, 2018. This report discusses our results of operations for this period compared to the thirteen-week period that began May 1, 2017 and the twenty-six week period that began January 30, 2017, which both ended July 30, 2017; and our financial condition as of July 29, 2018 compared to January 28, 2018.

 

References in these notes to the condensed consolidated financial statements of the Company to:

 

 

the 2019 fiscal year and comparable terminology mean the fiscal year that began January 29, 2018 and will end February 3, 2019; and

 

 

the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and ended January 28, 2018.

 

2.      Recently Adopted Accounting Policies

 

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 was issued in response to concerns regarding current accounting guidance that requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income. Consequently, the stranded tax effects would not reflect the appropriate tax rate. The amendments of this ASU allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical federal corporate income tax rate of 35.0% and the newly enacted corporate income tax rate of 21.0%. We adopted ASU 2018-02 in the first quarter of fiscal 2019. The adoption resulted in the reclassification of $111,000 from accumulated other comprehensive income to retained earnings in the first quarter of fiscal 2019.

 

 

 

In May 2017, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and reduce diversity in practice, cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (a) the fair value of the modified award is the same immediately before and after the modification; (b) the vesting conditions of the modified award are the same immediately before and after the modification; and (c) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. We adopted the amendments in ASU 2017-09 as of the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not have an impact upon our financial condition or results of operations.

 

In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”).  Previously net benefit cost was reported as an employee cost within operating income.  The amendment requires the bifurcation of net benefit cost.  The service cost component will be presented with the other employee compensation costs in operating income.  The other components will be reported separately outside of operations and will not be eligible for capitalization.  The amendment is effective for public entities for the annual reporting period beginning after December 15, 2017.  The guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost (including gains and losses on curtailments and settlements, and termination benefits paid through plans), and on a prospective basis for the capitalization of only the service cost component of net benefit cost.  Amounts capitalized into assets prior to the date of adoption should not be adjusted through a cumulative effect adjustment but should continue to be recognized in the normal course, as for example, inventory is sold or fixed assets are depreciated. We adopted ASU 2017-17 as of the beginning of our 2019 fiscal year on January 29, 2018. Please see Note 10 Employee Benefit Plans for the impact on our financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (a) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (b) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 apply prospectively and became effective for us at the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not impact our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Its objective is to reduce existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costs related to debt prepayments or extinguishments, payments representing accreted interest on discounted debt, payments of contingent consideration after a business combination, proceeds from insurance claims and company-owned life insurance and distributions from equity method investees, among others. We adopted ASU 2016-15 as of the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not have a material impact upon our financial condition or results of operations.

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This new standard replaced most existing revenue recognition guidance in GAAP and codified guidance under FASB Topic 606. The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services.

 

 

 

We adopted ASU No. 2014-09 as of January 29, 2018 using the modified retrospective method. As a result of adopting Topic 606, we recorded an increase to retained earnings of approximately $210,000, net of tax, as of January 29, 2018, due to the cumulative effect related to the change in accounting for shipments with synthetic FOB destination shipping terms. Results for the reporting period beginning after January 29, 2018 are presented under Topic 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under previous guidance. However, given the nature of our products and our sales terms and conditions, with the exception of sales with synthetic FOB destination shipping terms which are immaterial, the timing and amount of revenue recognized based on the underlying principles of ASU No. 2014-09 are consistent with our revenue recognition policy under previous guidance.

 

In accordance with the new guidance, we recognize revenue at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control.

 

Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products less trade discounts and customer allowances. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.

 

We regularly review and revise accounts receivable for doubtful accounts and customer allowances based upon historical bad debts and customer allowances and any agreements with specific customers. If the financial condition of a customer or customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt allowances may be required. Orders are generally non-cancellable once loaded into a shipping trailer or container. Physical product returns are very rare due to the high probability of damages to our products in return transit.

 

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

 

In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer.

 

We record contract liabilities when we receive partial or full payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in “Customer Deposits” on the accompanying condensed consolidated balance sheets. We had contract liabilities of $5.0 million as of July 29, 2018.

 

As part of our adoption of Topic 606, we elected the following practical expedients and policy elections:

 

 

Sales taxes collected are presented on a net basis, consistent with our policy prior to the adoption of Topic 606. Therefore, this will not affect our financial statements or results of operations;

 

 

Incremental costs of obtaining a contract, namely sales and designer commissions, are recorded as an expense when incurred in selling, general and administrative expenses, since contracts are on an order to order basis and are therefore short-term in nature. This accounting treatment is consistent with our policy prior to the adoption of Topic 606. Therefore, this will not affect our financial statements or results of operations; and

 

 

Shipping and handling activities are accounted for as fulfillment activities whether they occur before or after the customer obtains control of the goods. This practice is consistent with our policy prior to the adoption of Topic 606. Therefore, this practice will not affect our financial statements or results of operations.

 

 

3.     Casualty Loss

 

On May 18, 2018, the Martinsville/Henry County, Va. area experienced torrential rains. Two of our Hooker Branded segment warehouse facilities were damaged as a result. We believe that the costs associated with the recovery efforts will exceed our insurance deductible of $500,000. Consequently, we recorded a casualty loss of $500,000 during the fiscal 2019 second quarter. We expect that amounts in excess of our deductible will be fully covered by the insurance policy in force at the time of the loss. The casualty loss caused only a nominal disruption in our ability to fulfill and ship orders.

 

4.     Accounts Receivable

 

         

July 29,

   

January 28,

 
         

2018

   

2018

 
                       

Trade accounts receivable

  $ 88,842     $ 98,592  

Other accounts receivable allowances

    (4,429 )     (5,117 )

Allowance for doubtful accounts

    (829 )     (1,014 )

   Accounts receivable

  $ 83,584     $ 92,461  

 

5.     Inventories

 

   

July 29,

   

January 28,

 
   

2018

   

2018

 

Finished furniture

  $ 104,650     $ 92,502  

Furniture in process

    2,897       1,440  

Materials and supplies

    9,509       8,780  

   Inventories at FIFO

    117,056       102,722  

Reduction to LIFO basis

    (18,591 )     (18,263 )

   Inventories

  $ 98,465     $ 84,459  

 

 6.     Property, Plant and Equipment

 

   

Depreciable Lives

   

July 29,

   

January 28,

 
   

(In years)

   

2018

   

2018

 
                       

Buildings and land improvements

  15 - 30     $ 24,435     $ 24,298  

Computer software and hardware

  3 - 10       18,457       18,302  

Machinery and equipment

  10       8,725       8,586  

Leasehold improvements

 

Term of lease

      9,108       8,982  

Furniture and fixtures

  3 - 10       2,230       2,186  

Other

  5       626       612  

   Total depreciable property at cost

          63,581       62,966  

Less accumulated depreciation

          37,532       35,100  

   Total depreciable property, net

          26,049       27,866  

Land

          1,067       1,067  

Construction-in-progress

          531       316  

   Property, plant and equipment, net

        $ 27,647     $ 29,249  

 

7.      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 July 29, 2018 and January 28, 2018, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.

 

As of January 28, 2018, the assets of the Home Meridian segment’s legacy Pension Plan (the “Pension Plan”) were measured at fair value on a recurring basis based on Level 1 inputs. Pension Plan assets, held in a trust account by the Plan’s trustee, primarily consist of a wide-range of mutual fund asset classes, including domestic and international equities, fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries. As of January 31, 2018, the date of the latest actuarial valuation, Pension Plan assets were netted against the Plan’s Projected Benefit Obligation (“PBO”) on that date to determine the Pension Plan’s funded status. Since the PBO exceeded the market value of the Pension Plan’s assets, the funded status is recorded in our condensed consolidated balance sheets as a net liability. As of July 29, 2018, the net liability for this plan was $2.4 million shown on the “Pension Plan” line of our condensed consolidated balance sheets. The market value of pension plan assets shown below are as of January 31, 2018. See Note 10. Employee Benefit Plans for additional information about the Plan.

 

Our assets measured at fair value on a recurring basis at July 29, 2018 and January 28, 2018, were as follows:

 

   

Fair value at July 29, 2018

   

Fair value at January 28, 2018

 

Description

 

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(In thousands)

 

Assets measured at fair value

                                                               

Company-owned life insurance

  $ -     $ 23,229     $ -     $ 23,229     $ -     $ 23,622     $ -     $ 23,622  

Pension Plan assets*

    8,757       -       -       8,757       8,757       -       -       8,757  
                                                                 

* as of January 28, 2018 for Pension Plan assets.

 

8.     Intangible Assets

 

       

July 29,

   

January 28,

 

Non-amortizable Intangible Assets

 

Segment

 

2018

   

2018

 

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  

 

Our amortizable intangible assets are recorded in our Home Meridian segment and All Other. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

 

   

Amortizable Intangible Assets

 
   

Customer

                 
   

Relationships

   

Trademarks

   

Totals

 
                         

Balance at January 28, 2018

  $ 24,644     $ 838     $ 25,482  

Amortization

    (1,162 )     (30 )     (1,192 )

Balance at July 29, 2018

  $ 23,482     $ 808     $ 24,290  

 

For the remainder of fiscal 2019, amortization expense is expected to be approximately $596,000 per quarter.

 

 

9.     Long-Term Debt

 

We made an unscheduled $10 million payment during the first quarter of fiscal 2019 towards the amounts outstanding under the New Unsecured Term Loan. Consequently, we wrote off $6,000 in capitalized debt issuance costs to interest expense. As of July 29, 2018, unamortized debt issuance costs of $76,000 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

 

As of July 29, 2018, we had an aggregate $28.5 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.5 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of July 29, 2018. There were no additional borrowings outstanding under the revolving credit facility as of July 29, 2018.

 

10. Employee Benefit Plans

 

We maintain three retirement plans for 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 as two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, one of two entities combined to form Home Meridian International. These legacy pension plan obligations include:

 

 

the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. The SERP is an unfunded plan and all benefits are paid solely out of our general assets; and

 

the Pension Plan for former Pulaski Furniture Corporation employees.

 

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. Pension Plan assets include a range of mutual fund asset classes and are measured at fair value using Level 1 inputs, which are quoted prices in active markets.

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

   

July 29,

   

July 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net periodic benefit costs

                               

      Service cost

    81       76       163       152  

      Interest cost

    206       280       413       559  

      Actuarial loss

    43       15       86       31  

      Expected return on pension plan assets

    (144 )     (234 )     (288 )     (467 )

      Expected administrative expenses

    70       70       140       140  
                                 

Consolidated net periodic benefit costs

  $ 256     $ 207     $ 514     $ 415  

 

We adopted ASU 2017-07 as of the beginning of our 2019 fiscal year on January 29, 2018. Components of net periodic benefit cost other than the service cost for the SRIP, SERP and the Pension Plan are included in the line item “Other income, net” in our condensed consolidated statements of income. Service cost is included in our condensed consolidated statements of income under “Selling and administrative expenses”. The adoption resulted in the reclassification of $131,000 and $262,000 expense from Selling and administrative expenses to Other income, net in the second quarter and first half of our fiscal 2018 condensed consolidated statements of income.

 

The expected long-term rate of return on Pension Plan assets is 6.9% as of the Pension Plan’s most recent valuation date of January 28, 2018.

 

 

 

We contributed $110,000 in required contributions to the Pension Plan in the fiscal 2019 first half. Subsequent to the end of the fiscal 2019 second quarter, we made an additional contribution of $3 million to the Pension Plan. See Note 14 “Subsequent Events” for additional information.

 

The SRIP and SERP plans are unfunded plans. Consequently, we expect to pay a total of approximately $349,000 in benefit payments from our general assets during the remainder of fiscal 2019 to fund SRIP and SERP payments.

 

11.     Earnings Per Share

 

We refer you to the discussion of Earnings Per Share in Note 1-Summary of Significant Accounting Policies, in the financial statements included in our 2018 Annual Report, for additional information concerning the calculation of earnings per share.

 

We have issued restricted stock awards to non-employee members of the board of directors since 2006 and 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 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, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

 

   

July 29,

   

January 28,

 
   

2018

   

2018

 
                 

Restricted shares

    22       16  

Restricted stock units

    14       19  
      36       35  

 

All restricted shares and RSUs 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

   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

   

July 29,

   

July 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 8,693     $ 7,778     $ 15,850     $ 12,524  

   Less: Unvested participating restricted stock dividends

    3       3       5       6  

            Net earnings allocated to unvested participating restricted stock

    16       16       24       27  

Earnings available for common shareholders

    8,674       7,759       15,821       12,491  
                                 

Weighted average shares outstanding for basic earnings per share

    11,760       11,565       11,755       11,554  

Dilutive effect of unvested restricted stock and RSU awards

    24       28       20       33  

   Weighted average shares outstanding for diluted earnings per share

    11,784       11,593       11,775       11,587  
                                 

Basic earnings per share

  $ 0.74     $ 0.67     $ 1.35     $ 1.08  
                                 

Diluted earnings per share

  $ 0.74     $ 0.67     $ 1.34     $ 1.08  

 

 

 

12. Income Taxes

 

We recorded income tax expense of $2.9 million for the fiscal 2019 second quarter compared to $4.2 million for the comparable prior year period. The effective tax rates for the fiscal 2019 and 2018 second quarters were 24.9% and 35.2%, respectively. The effective tax rates for the first half of fiscal 2019 and 2018 were 23.0% and 34.4%, respectively. Our effective tax rate was lower in the fiscal 2019 second quarter and first half as a result of the recently enacted Tax Cuts and Job Act. We adopted ASU 2014-09 and 2018-02 in the first quarter of fiscal 2019. The adoptions resulted in the reclassification of $120,000 from federal tax payable and $111,000 from Accumulated Other Comprehensive Income, both to retained earnings.

 

The net unrecognized tax benefits as of July 29, 2018 and January 28, 2018, which, if recognized, would affect our effective tax rate are $81,000 and $80,000, respectively.

 

Tax years ending February 1, 2015 through January 28, 2018 remain subject to examination by federal and state taxing authorities.

 

13.      Segment Information

 

As a public reporting entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:

 

 

better understand our performance;

 

better assess our prospects for future net cash flows; and

 

make more informed judgments about us as a whole.

 

We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.

 

We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary.  In the fourth quarter of fiscal 2018, we updated our reportable segments as follows:  Hooker Upholstery was aggregated with Hooker Casegoods and reported as the Hooker Branded segment. The domestic upholstery operations of Shenandoah Furniture, Sam Moore and Bradington-Young were moved into All Other with the Company’s H Contract business and the remains of the Company’s Homeware division, which was shuttered earlier in fiscal 2018. The Home Meridian segment remains unchanged. Therefore, for financial reporting purposes, we are organized into two reportable segments and “All Other”, which includes the remainder of our businesses:

 

 

Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; 

 

Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; and

 

All Other, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore and Shenandoah Furniture and H Contract and Homeware, the latter two businesses started in 2013. None of these operating segments met the ASC 280 aggregation criteria nor were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280. We note that Homeware failed to reach critical mass and its operations were wound down during the fiscal 2018 second quarter.

 

 

 

 

The following table presents segment information for the periods, and as of the dates, indicated:

 

   

Thirteen Weeks Ended

           

Twenty-Six Weeks Ended

         
   

July 29, 2018

           

July 30, 2017

           

July 29, 2018

           

July 30, 2017

         
           

% Net

           

% Net

           

% Net

           

% Net

 

Net Sales

         

Sales

           

Sales

           

Sales

           

Sales

 

   Hooker Branded

  $ 40,551       24.0 %   $ 40,889       26.2 %   $ 83,322       26.7 %   $ 78,361       27.3 %

   Home Meridian

    101,022       59.9 %     96,403       61.7 %     171,618       55.1 %     170,105       59.2 %

   All Other

    27,088       16.1 %     19,016       12.2 %     56,613       18.2 %     38,714       13.5 %

Consolidated

  $ 168,661       100.0 %   $ 156,308       100.0 %   $ 311,553       100.0 %   $ 287,180       100.0 %
                                                                 

Gross Profit

                                                               

   Hooker Branded

  $ 12,616       31.1 %   $ 12,547       30.7 %   $ 27,038       32.5 %   $ 25,081       32.0 %

   Home Meridian

    17,398       17.2 %     16,061       16.7 %     27,814       16.2 %     27,067       15.9 %

   All Other

    5,631       20.8 %     4,509       23.7 %     12,759       22.5 %     9,112       23.5 %

Consolidated

  $ 35,645       21.1 %   $ 33,117       21.2 %   $ 67,611       21.7 %   $ 61,260       21.3 %
                                                                 

Operating Income

                                                               

   Hooker Branded

  $ 4,943       12.2 %   $ 5,133       12.6 %   $ 11,669       14.0 %   $ 10,083       12.9 %

   Home Meridian

    5,628       5.6 %     5,265       5.5 %     5,339       3.1 %     6,111       3.6 %

   All Other

    1,294       4.8 %     1,528       8.0 %     4,240       7.5 %     2,971       7.7 %

Consolidated

  $ 11,865       7.0 %   $ 11,926       7.6 %   $ 21,248       6.8 %   $ 19,165       6.7 %
                                                                 

Capital Expenditures

                                                               

   Hooker Branded

  $ 168             $ 464             $ 378             $ 966          

   Home Meridian

    122               190               158               492          

   All Other

    173               144               297               207          

Consolidated

  $ 463             $ 798             $ 833             $ 1,665          
                                                                 

Depreciation

   & Amortization

                                                               

   Hooker Branded

  $ 496             $ 479             $ 980             $ 983          

   Home Meridian

    601               663               1,192               1,318          

   All Other

    764               196               1,517               396          

Consolidated

  $ 1,861             $ 1,338             $ 3,689             $ 2,697          

 

   

As of July 29,

           

 

            As of January 28,                          
   

2018

   

%Total

   

 

   

 

    2018               %Total          

Identifiable Assets

         

Assets

           

 

                      Assets          

   Hooker Branded

  $ 130,937       48.0 %                   $ 129,986               47.8 %        

   Home Meridian

    106,959       39.2 %                     107,139               39.6 %        

   All Other

    35,149       12.9 %                     34,394               12.6 %        

Consolidated

  $ 273,045       100.0 %                   $ 271,519               100.0 %        

   Consolidated Goodwill and Intangibles

    77,005                               78,197                          

Total Consolidated Assets

  $ 350,050                             $ 349,716                          

 

 

 

Sales by product type are as follows:

 

Net Sales (in thousands)

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

July 29, 2018

   

%Total

   

July 30, 2017

   

%Total

   

July 29, 2018

   

%Total

   

July 30, 2017

   

%Total

 

Casegoods

  $ 105,703       63 %   $ 97,210       62 %   $ 195,759       63 %   $ 186,223       65 %

Upholstery

    62,958       37 %     59,098       38 %     115,794       37 %     100,957       35 %
    $ 168,661             $ 156,308       100 %   $ 311,553             $ 287,180       100 %

 

14. Subsequent Events

 

Dividends

 

On August 30, 2018, our board of directors declared a quarterly cash dividend of $0.14 per share, payable on September 28, 2018 to shareholders of record at September 14, 2018.

 

Additional Funding of Pension Plan

 

On September 5, 2018, we made an additional $3 million contribution to the Pension Plan as part of a Pension Plan asset de-risking strategy. As part of this strategy, Pension Plan assets will be moved into generally lower risk investments to preserve asset value. No benefits have accrued under the Pension Plan since it was frozen in March 1995. We expect savings from reduced Pension Plan administrative costs and PBGC premiums as a result of this contribution.

 

 

 

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 Division,” “Hooker Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment and All Other which includes Bradington-Young, Sam Moore, Shenandoah Furniture and H Contract.

 

References to the “Shenandoah acquisition” refer to the acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017.  Comparable prior-year information for Shenandoah is not included in the financial statements presented in this report. 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:

 

 

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;

 

 

the risks related to the recent Shenandoah acquisition including  integration costs, costs related to acquisition debt, maintaining Shenandoah’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, the recognition of significant additional depreciation and amortization expenses by the combined entity,  the loss of key employees from Shenandoah, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the business which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Shenandoah acquisition;

 

 

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

 

 

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;

 

 

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

 

 

the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet;

 

 

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

 

 

 

 

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

 

 

risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;

 

 

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

 

 

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

 

 

changes in actuarial assumptions, the interest rate environment, the return on plan assets and future funding obligations related to the Home Meridian segment’s legacy Pension Plan, which can affect future funding obligations, costs and plan liabilities;

 

 

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

 

 

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

 

 

price competition in the furniture industry;

 

 

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;

 

 

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;

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

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 2018 annual report on Form 10-K (the “2018 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,” “second quarter” or “quarterly period”) that began April 30, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began January 29, 2018, which both ended July 29, 2018. This report discusses our results of operations for this period compared to the 2018 fiscal year thirteen-week period that began May 1, 2017 and the twenty-six week period that began January 30, 2017, which both ended July 30, 2017; and our financial condition as of July 29, 2018 compared to January 28, 2018.

 

References in this report to:

 

 

the 2019 fiscal year and comparable terminology mean the fiscal year that began January 29, 2018 and will end February 3, 2019; and

 

 

the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and ended January 28, 2018.

 

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 2018 annual report. Our 2018 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 2018 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), and leather and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. Our net sales are derived from the sale of home furnishings, as well as hospitality and contract furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2017 shipments to U.S. retailers, according to a 2018 survey by a leading trade publication.

 

We believe that consumer home furnishings purchases are impacted by an array of factors, including general economic conditions (such as consumer confidence, availability of consumer credit, energy and other commodity prices) and housing and mortgage markets. These purchases are also impacted by lifestyle-driven factors such as changes in fashion trends, disposable income, household formation and turnover, as well as competition with other discretionary purchases. Hospitality furniture sales are driven primarily by new hotel construction and hotel remodeling activity, which is linked to the strength of the overall economy, including business and personal spending levels. Contract furniture sales are driven largely by senior living facility construction and remodeling activity, which is linked to the number of consumers entering retirement, which is partially related to the strength of the overall economy, including stock market performance.

 

Approximately 87% of our fiscal 2018 sales were of imported furniture products, primarily from Asia. Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers, such as duties and tariffs, diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. Our domestic upholstery operations have significantly higher overhead and fixed costs than our import operations, and their profitability can be and has been adversely affected by economic downturns.

 

 

 

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

 

Hooker’s acquisition of the business of Home Meridian has better positioned us in some of the fastest growing and emerging channels of distribution, including e-commerce, warehouse membership clubs and contract channels of distribution, although at lower margins. This acquisition has provided the Home Meridian segment’s current leadership team with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.

 

Hooker’s acquisition of the business of Shenandoah, a North Carolina-based domestic upholsterer, has better positioned us in the “lifestyle specialty” retail distribution channel, which we believe is gaining market share and doing well with multiple demographic groups. For that channel, domestically-produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.

 

Executive Summary-Results of Operations

 

The Shenandoah acquisition closed during the third quarter of fiscal 2018. Consequently, All Other’s results only include Shenandoah’s results from February 2018 through July 2018. Shenandoah’s prior year results are not included in the results discussed below.

 

Consolidated net sales for fiscal 2019 second quarter increased $12.4 million or 7.9% as compared to the prior year period, to $168.7 million due primarily to the inclusion of Shenandoah’s net sales and a 4.8% net sales increase in the Home Meridian segment. The Hooker Branded segment net sales were essentially flat in the second quarter.

 

For the fiscal 2019 first half, consolidated net sales increased $24.4 million or 8.5% to $311.6 million primarily due to sales increases in All Other and in the Hooker Branded segment. All Other grew net sales by 46.2% and contributed almost $18 million to the consolidated net sales increase largely as the result of the Shenandoah acquisition. The Hooker Branded segment’s net sales increased $5.0 million or 6.3%, as compared to the prior year first half. Home Meridian segment net sales were essentially flat in the fiscal 2019 first half.

 

Consolidated net income increased $916,000 or 11.8% and $3.3 million or 26.6%, as compared to the prior year second quarter and first half, respectively. The increase was attributable to higher earnings, as well as the tax rate reduction due to the recently enacted Tax Cuts and Job Act of 2017.

 

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

 

 

Casualty loss. We recorded a $500,000 casualty loss in the Hooker Branded segment in the fiscal 2019 second quarter due to damage sustained to two of our Hooker Branded distribution facilities located in Virginia. The $500,000 represents facility repair expenses incurred up to our property insurance deductible of the same amount. The casualty loss caused only a nominal disruption in our ability to fulfill and ship orders.

 

 

Gross profit. Fiscal 2019 second quarter consolidated gross profit increased in absolute terms due primarily to increased gross profit in the Home Meridian segment as a result of increased net sales and increased All Other gross profit principally due to the addition of Shenandoah’s net sales in the quarter. Gross profit in the Hooker Branded segment was essentially flat due to flat net sales and the casualty loss mentioned above. For the fiscal 2019 first half, consolidated gross profit increased in absolute terms, primarily due to increases in All Other and in the Hooker Branded segment. All Other gross profit increased primarily due to the inclusion of Shenandoah’s results in the first half. Hooker Branded segment gross profit increased due to sales growth in that segment, partially offset by the casualty loss mentioned above.

 

 

 

 

Selling and administrative expenses. Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2019 second quarter due primarily to the addition of Shenandoah’s operations in All Other and higher compensation and benefits expense. For the fiscal 2019 first half, consolidated S&A expenses increased in absolute terms but stayed flat as a percentage of net sales, also due to the addition of Shenandoah’s operations in All Other and higher compensation and benefits expense.

 

 

Intangible asset amortization expense. Intangible amortization expense increased $263,000 and $525,000 for the fiscal 2019 second quarter and first half, respectively, due to the addition of amortization expense on Shenandoah acquisition-related intangibles acquired in the fiscal 2018 third quarter.

 

 

Operating income. Consolidated operating income stayed essentially flat in absolute terms and decreased as a percentage of net sales in the fiscal 2019 second quarter and increased $2.1 million or 10.9% in the fiscal 2019 first half, due to the factors discussed above and in greater detail in the analysis below.

 

Review

 

Hooker Branded segment net sales were softer in the fiscal 2019 second quarter, after two consecutive quarters of sales growth, which we believe is due primarily to the slower summer selling season. Hooker Upholstery, fully recovered from the vendor quality issue in fiscal 2017, has continued to bring new introductions to market and has benefited from new management and additional operational focus in that business.

 

The Home Meridian segment resolved disruptions with its Asian suppliers which occurred during the fiscal 2019 first quarter and grew net sales by $4.6 million or 4.8% in the second quarter. Fiscal 2019 first half net sales were essentially flat compared to the first half of prior year. The Samuel Lawrence Hospitality business unit had a strong quarter, with the success of a new product line and grew sales by over 30% in the second quarter and first half, compared to prior year periods, and finished the second quarter with a backlog 55% higher than at the same time last year. Sales to major furniture chains were essentially flat and sales to club accounts decreased in the second quarter due to the episodic nature of the club business. Incoming orders and backlog both trended lower than prior year period but reversed that decline in the early weeks of the third quarter of fiscal 2019. Ecommerce sales continued to grow in the second quarter, growing by approximately 30% compared to prior year six months.

 

The sales increase in All Other was mostly attributable to the addition of Shenandoah’s net sales, the business we acquired in the fiscal 2018 third quarter. Bradington-Young’s net sales were essentially flat in the fiscal 2019 second quarter; however, incoming orders increased about 7% and backlog was over 35% higher than the prior year quarter. All upholstery units experienced a negative impact on margins from price increases in materials and components such as foam, plywood and steel and we experienced a lag between those cost increases and our own price increases to customers. However, we expect to catch up during the third quarter. The unfavorable sales trend at Sam Moore which began in the first quarter, continued into the second quarter. While orders were lower in the second quarter, quarter-end backlog was 8% higher than the prior-year period, which we believe will improve Sam Moore’s sales in the third quarter. Cost of goods sold was also negatively affected by large medical claims in All Other. Additionally, Sam Moore changed its vacation schedule and had approximately one less work week than in the same quarter a year ago and the loss of a key retail customer, who has decided to shift to an in-house supplier model, also negatively impacted Sam Moore during the quarter.

 

Our six-month operating results also benefited from the addition of Shenandoah’s operating income as well as about $1 million in gains on Company-owned life insurance recorded in the first quarter, and lower bad debt expense due to the absence of a write-off of a customer balance the prior year, partially offset by the casualty loss in the Hooker Branded segment. In addition to our operating results, we generated over $15 million in cash from operating activities, paid about $14 million towards our term loans, including a $10 million unscheduled payment, and paid $3.3 million in cash dividends to our shareholders. Cash and cash equivalents stood at $29.2 million at quarter-end, close to the balance at the end of the 2018 fiscal year. Profitability, along with inventory management and cautious capital expenditures, have helped us maintain our strong, stable balance sheets.

 

 

 

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

   

Twenty-Six Weeks Ended

 
   

July 29,

   

July 30,

   

July 29,

   

July 30,

 
   

2018

   

2017

   

2018

   

2017

 

Net sales

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of sales

    78.6       78.8       78.1       78.7  

Casualty loss

    0.3       -       0.2       -  

Total cost of sales

    78.9       78.8       78.3       78.7  

Gross profit

    21.1       21.2       21.7       21.3  

Selling and administrative expenses

    13.7       13.3       14.5       14.4  

Intangible asset amortization

    0.4       0.2       0.4       0.2  

Operating income

    7.1       7.6       6.8       6.7  

Other income, net

    -       0.2       -       0.2  

Interest expense, net

    0.2       0.2       0.2       0.2  

Income before income taxes

    6.9       7.7       6.6       6.6  

Income tax expense

    1.7       2.7       1.5       2.3  

Net income

    5.2       5.0       5.1       4.4  

 

 Fiscal 2019 Second Quarter Compared to Fiscal 2018 Second Quarter

 

   

Net Sales

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

           

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 40,551       24.0 %   $ 40,889       26.2 %   $ (338 )     -0.8 %

Home Meridian

    101,022       59.9 %     96,403       61.7 %     4,619       4.8 %

All Other

    27,088       16.1 %     19,016       12.2 %     8,072       42.4 %

Consolidated

  $ 168,661       100 %   $ 156,308       100 %   $ 12,353       7.9 %

 

Unit Volume

 

FY19 Q2 % Increase

vs. FY18 Q2

 

Average Selling Price (ASP)

 

FY19 Q2 % Increase

vs. FY18 Q2

 
                     

Hooker Branded

    -2.3 %  

Hooker Branded

    1.2 %

Home Meridian

    10.9 %  

Home Meridian

    -7.2 %

All Other*

    -6.9 %  

All Other*

    4.1 %

Consolidated

    8.4 %  

Consolidated

    -6.7 %

 

*Shenandoah is excluded from All Other in the Unit Volume and ASP tables above since it was not a part of our fiscal 2018 second quarter results. Consequently, we believe including its fiscal 2019 second quarter results would skew All Other’s results and reduce the usefulness of the table above.

 

 

 

Consolidated net sales increased due primarily to the inclusion of Shenandoah net sales in All Other and increased net sales in the Home Meridian segment. Hooker Branded segment net sales were essentially flat. The Hooker Branded segment’s unit volume decreased due to a slower summer selling season. Hooker Branded ASP increased due to favorable discounting, which partially offset the unit decline. The Home Meridian segment fully recovered from the first quarter vendor delay issue and shipped 10.9% more units in the second quarter. Home Meridian segment ASP decreased 7.2% due primarily to customer mix. The net sales increase in All Other was attributable to the inclusion of Shenandoah, partially offset by the sales decrease at Sam Moore. All Other’s ASP increased due to increased sales of higher-priced Bradington-Young products. All Other’s unit volumes decreased primarily due to decreased sales at Sam Moore, due to the loss of a major customer during the quarter, and essentially flat sales and fewer units shipped at Bradington-Young due to the continued shift towards higher-priced luxury motion products.

 

   

Gross Income and Margin

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

           

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 12,616       31.1 %   $ 12,547       30.7 %   $ 69       0.5 %

Home Meridian

    17,398       17.2 %     16,061       16.7 %     1,337       8.3 %

All Other

    5,631       20.8 %     4,509       23.7 %     1,122       24.9 %

Consolidated

  $ 35,645       21.1 %   $ 33,117       21.2 %   $ 2,528       7.6 %

 

Consolidated gross profit increased in absolute terms but was essentially flat as a percentage of net sales in the fiscal 2019 second quarter. The Hooker Branded segment’s gross profit stayed essentially flat in absolute terms due primarily to the $500,000 casualty loss recorded during the quarter and increased slightly as a percentage of net sales primarily due to lower discounting and favorable allowances in Hooker Casegoods, partially offset by higher discounts in Hooker Upholstery. Increased sales and lower discounts and allowances also contributed to improved gross profit in the Home Meridian segment in the second quarter. Increased gross profit in All Other was due primarily to the inclusion of Shenandoah’s results. It decreased as a percentage of net sales due primarily to higher indirect labor and overhead costs in our domestic upholstery manufacturing divisions.

  

   

Selling and Administrative Expenses (S&A)

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

           

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 7,673       18.9 %   $ 7,414       18.1 %   $ 259       3.5 %

Home Meridian

    11,437       11.3 %     10,463       10.9 %     974       9.3 %

All Other

    4,074       15.0 %     2,981       15.7 %     1,093       36.7 %

Consolidated

  $ 23,184       13.7 %   $ 20,858       13.3 %   $ 2,326       11.2 %

 

Consolidated selling and administrative (“S&A”) expenses increased in absolute terms and as a percentage of net sales in the fiscal 2019 second quarter due primarily to the addition of Shenandoah’s operations in All Other and higher compensation and benefits expense.

 

 

Hooker Branded segment S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2019 second quarter. Major drivers were higher employee compensation and benefits costs, partially due to increased headcount and higher employee medical costs, which were partially offset by lower bonus expense and lower selling costs.

 

 

Home Meridian segment S&A expenses increased in absolute terms and as a percentage of net sales due to increased compensation and benefits expense, increased professional service fees due to higher compliance costs and increased travel expenses.

 

 

All Other S&A expenses increased principally due to the inclusion of Shenandoah’s operations. All Other S&A expenses decreased as a percentage of net sales due to higher net sales.

 

 

 

 

   

Intangible Asset Amortization

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

           

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Intangible asset amortization

  $ 596       0.4 %   $ 333       0.2 %   $ 263       79.0 %

  

Intangible asset amortization expense was higher in the current year quarter due to the addition of Shenandoah acquisition-related amortization expense.

  

   

Operating Profit and Margin

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

         

July 30, 2017

         

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 4,943       12.2 %   $ 5,133       12.6 %   $ (190 )     -3.7 %

Home Meridian

    5,628       5.6 %     5,265       5.5 %     363       6.9 %

All Other

    1,294       4.8 %     1,528       8.0 %     (234 )     -15.3 %

Consolidated

  $ 11,865       7.0 %   $ 11,926       7.6 %   $ (61 )     -0.5 %

 

Operating profitability decreased as a percentage of net sales and was essentially flat in absolute terms, due to the factors discussed above.

 

   

Interest Expense, net

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

           

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Consolidated interest expense, net

  $ 364       0.2 %   $ 282       0.2 %   $ 82       29.1 %

 

Consolidated interest expense increased due to increases in the interest rates on our variable-rate term loans, partially offset by the unscheduled $10 million debt payment made earlier in the fiscal year on the New Unsecured Term Loan.

  

   

Income taxes

 
   

Thirteen Weeks Ended

 
   

July 29, 2018

         

July 30, 2017

           

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Consolidated income tax expense

  $ 2,881       1.7 %   $ 4,234       2.7 %   $ (1,353 )     -32.0 %
                                                 

Effective Tax Rate

    24.9 %             35.2 %                        

 

We recorded income tax expense of $2.9 million for the fiscal 2019 second quarter compared to $4.2 million for the comparable prior year period. The effective tax rates for the fiscal 2019 and 2018 first quarters were 24.9% and 35.2%, respectively. Our effective tax rate was lower in the fiscal 2019 second quarter as a result of the recently enacted Tax Cuts and Job Act of 2017.

 

   

Net Income  

 
   

Thirteen Weeks Ended 

 
   

July 29, 2018

           

July 30, 2017

         

$ Change

   

% Change

 

Net Income

         

% Net Sales

       

% Net Sales

             

Consolidated

  $ 8,693       5.2 %   $ 7,778       5.0 %   $ 915       11.8 %
                                                 

Diluted earnings per share

  $ 0.74             $ 0.67                          

 

 

 

Fiscal 2019 First Half Compared to Fiscal 2018 Second Half

 

   

Net Sales

 
   

Twenty-Six Weeks Ended

 
   

July 29, 2018

         

July 30, 2017

         

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 83,322       26.7 %   $ 78,361       27.3 %   $ 4,961       6.3 %

Home Meridian

    171,618       55.1 %     170,105       59.2 %     1,513       0.9 %

All Other

    56,613       18.2 %     38,714       13.5 %     17,899       46.2 %

Consolidated

  $ 311,553       100 %   $ 287,180       100 %   $ 24,373       8.5 %

 

Unit Volume

 

FY19 YTD % Increase

vs. FY18 YTD

 

Average Selling Price (ASP)

 

FY19 YTD % Increase

vs. FY18 YTD

 
                     

Hooker Branded

    4.6 %  

Hooker Branded

    1.6 %

Home Meridian

    2.8 %  

Home Meridian

    -3.2 %

All Other*

    -6.2 %  

All Other*

    6.3 %

Consolidated

    2.6 %  

Consolidated

    -1.3 %

 

*Shenandoah is excluded from All Other in the Unit Volume and ASP tables above since it was not a part of our fiscal 2018 first half results. Consequently, we believe including its fiscal 2019 first half results would skew All Other results and reduce the usefulness of the table above.

 

Consolidated net sales increased due primarily to the inclusion of Shenandoah’s net sales in All Other and a sales increase in the Hooker Branded segment. The Home Meridian segment’s net sales were essentially flat. The Hooker Branded segment benefited from increased unit volume and ASP. Unit volume increased primarily due to strong sales and increased incoming orders in the first quarter and ASP increased due to favorable discounting. The Home Meridian segment was negatively affected by vendor shipping delays in the first quarter as the result of the timing of Chinese New Year. We resolved the issue and regained some of the sales volume in the second quarter. Home Meridian segment ASP decreased due to customer mix. The net sales increase in All Other was attributable to the inclusion of Shenandoah’s net sales and to a lesser extent, sales growth at Bradington-Young, partially offset by a sales decrease at Sam Moore, due principally to the loss of a major customer, and a decline in upholstery sales unit volume. All Other’s ASP increased due to increased sales of higher-priced luxury motion products and the lack of Homeware net sales due to the shuttering of that division in the prior year. All Other’s unit volume decreased due to the sales decreases at Sam Moore and the lack of Homeware unit volume in the current fiscal year.

 

   

Gross Income and Margin

 
   

Twenty-Six Weeks Ended

 
   

July 29, 2018

         

July 30, 2017

         

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 27,038       32.5 %   $ 25,081       32.0 %   $ 1,957       7.8 %

Home Meridian

    27,814       16.2 %     27,067       15.9 %     747       2.8 %

All Other

    12,759       22.5 %     9,112       23.5 %     3,647       40.0 %

Consolidated

  $ 67,611       21.7 %   $ 61,260       21.3 %   $ 6,351       10.4 %

 

Consolidated gross profit increased in absolute terms, primarily due to increases in All Other and in the Hooker Branded segment. All Other gross profit increased primarily due to the inclusion of Shenandoah’s results in the first half. Hooker Branded segment gross profit increased due to sales growth in that segment, partially offset by the $500,000 casualty loss recorded and the absence in the current fiscal year of a one-time vendor price concession due to a vendor quality issue which led to lower product costs in the fiscal 2018 first quarter. Home Meridian’s gross profit increased in absolute terms and as a percentage of net sales due to higher sales volume during the second quarter, favorable product costs and lower variable expenses compared to the prior year period.

 

 

 

   

Selling and Administrative Expenses (S&A)

 
   

Twenty-Six Weeks Ended

 
   

July 29, 2018

         

July 30, 2017

         

$ Change

   

% Change

 
           

% Net Sales

       

% Net Sales

             

Hooker Branded

  $ 15,369       18.4 %   $ 14,999       19.1