| ■ | Recently enacted tariffs and potential future increases in tariffs on manufactured goods imported from China for predominantly all of our casegoods furniture products and for a significant portion of our upholstered products. Consequently:
| § | A disruption in supply from China or from our most significant Chinese supplier could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity.business. |
Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on certain goods imported into the United States from China, including all furniture and furniture components manufactured in China, with tariffs originally scheduled to increase to 25% in 2019. In December, the President agreed to suspend further trade action for 90 days and in February 2019 to further suspend trade action, to continue negotiations and to leave the tariff at the 10% rate for the time being. In fiscal 2016, imported products sourced from China and Vietnam accounted for approximately 68% and 26%, respectively,2019, 44% of our importimported purchases were from China. Inability to reduce product costs, pass through price increases or find other suitable manufacturing sources outside of China may have a material adverse impact on sales volume, earnings and liquidity. In addition, the factory in China from which we directly source the largest portion oftariffs, and our import products accounted for approximately 58% of our worldwide purchases of imported products. Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subjectresponses to the risktariffs, may cause our products to become less competitive due to price increases or less profitable due to lower margins. Our inability to effectively manage the negative impacts of losses arising from explosionschanging U.S. and fires. A disruption in our supply chain from this factory, or from China or Vietnam in general, could significantly impact our ability to fill customer orders for products manufactured at that factory or in that country. If such a disruption were to occur, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Martinsville, VA to adequately meet demand for approximately 4.5 months with up to an additional 1.25 months available for immediate shipment from our warehouses in Asia. We believe that we could, most likely at higher cost, source most of the products currently sourced in China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to 6 months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture supplier, or from China or Vietnam in general,foreign trade policies could adversely affect our sales, earnings,business and financial condition and liquidity.results. 9
| §■ | We are subject to changes in U.S. and foreign government regulations and in the political, social and economic climates of the countries from which we source our products. |
Changes in political, economic, and social conditions, as well as in the laws and regulations in the foreign countries from which we source our products could adversely affect our sales, earnings, financial condition and liquidity. These changes could make it more difficult to provide products and service to our customers or could increase the cost of those products. International trade regulations and policies of the United States and the countries from which we source finished products could adversely affect us. Imposition of trade sanctions relating to imports, taxes, import duties and other charges on imports affecting our products could increase our costs and decrease our earnings. For example, since 2004, the U.S. Department of Commerce has imposedimposes tariffs on wooden bedroom furniture coming into the United States from China. In this case, none of the rates imposed have been of sufficient magnitude to alter our import strategy in any meaningful way; however, these and other tariffs are subject to review and could be implementedincreased or increasednew tariffs implemented in the future. | §■ | A disruption in supply from Vietnam or China or from our most significant Vietnamese or Chinese suppliers could adversely affect our ability to timely fill customer orders for these products and decrease our sales, earnings and liquidity. |
In fiscal 2019, imported products sourced from Vietnam and China accounted for nearly all of our import purchases and our top five suppliers in Vietnam and China account for approximately half of our fiscal 2019 import purchases. Furniture manufacturing creates large amounts of highly flammable wood dust and utilizes other highly flammable materials such as varnishes and solvents in its manufacturing processes and is therefore subject to the risk of losses arising from explosions and fires. A disruption in our supply chain, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured in those countries. If such a disruption were to occur, we believe that we would have sufficient inventory on hand and in transit to our U.S. warehouses in Virginia, North Carolina and California to adequately meet demand for several months or slightly longer with an additional month’s worth of demand available for immediate shipment from our warehouses in Asia. We believe we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to six months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, a disruption in our supply chain from our largest import furniture suppliers, or from Vietnam or China in general, could adversely affect our sales, earnings, financial condition and liquidity. | ■ | Increased freight costs on imported products could decrease earnings and liquidity. |
Ocean freight costs on imported products currently represent a significant portion of the cost of our imported products. Ocean freight rates on our imported products remain near historical lows due to a myriad of factors including sluggish global growth, low petroleum prices and overcapacity among ocean freight carriers. While we believe ocean freight rates are at or near the lower range of possible costs, we are unable to predict how much longer these low rates will persist. Increased rates in the future would likely adversely affect earnings, financial condition and liquidity. | ■ | Our dependence on non-U.S.non-owned suppliers could, over time, adversely affect our ability to service customers. |
We rely exclusivelyheavily on non-U.S. suppliers for our casegoods furniture products and forwe do not own or control, including a significant portionlarge number of non-US suppliers. All of our upholstered products. Our non-U.S. suppliers may not provide goods that meet our quality, design or other specifications in a timely manner and at a competitive price. If our suppliers do not meet our specifications, we may need to find alternative vendors,suppliers, potentially at a higher cost, or may be forced to discontinue products. Also, delivery of goods from non-U.S. vendorssuppliers may be delayed for reasons not typically encountered for domestically manufactured furniture, such as shipment delays caused by customs issues, labor issues, port-related issues such as weather, congestion or port equipment, decreased availability of shipping containers and/or the inability to secure space aboard shipping vessels to transport our products. Our failure to timely fill customer orders due to an extended business interruption for a major non-U.S. supplier, or due to transportation issues, could negatively impact existing customer relationships and adversely affect our sales, earnings, financial condition and liquidity. | §■ | Our inability to accurately forecast demand for our imported products could cause us to purchase too much, too little or the wrong mix of inventory. |
Manufacturing and delivery lead times for our imported products necessitate that we make forecasts and assumptions regarding current and future demand for these products. If our forecasts and assumptions are inaccurate, we may purchase excess or insufficient amounts of inventory. If we purchase too much or the wrong mix of inventory, we may be forced to sell it at lower margins, which could adversely affect our sales, earnings, financial condition and liquidity. If we purchase too little or the wrong mix of inventory, we may not be able to fill customer orders and may lose market share and weaken or damage customer relationships, which also could adversely affect our sales, earnings, financial condition and liquidity. 10
| §■ | Changes in the value of the U.S. Dollar compared to the currencies for the countries from which we obtain our imported products could adversely affect our sales, earnings, financial condition and liquidity. |
For imported products, we generally negotiate firm pricing with our foreign suppliers in U.S. Dollars, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we must pay for imported products beyond the negotiated periods. These price changes could decrease our sales, earnings, financial condition and liquidity during affected periods. | §■ | Supplier transitions, including cost or quality issues, could result in longer lead times and shipping delays. |
In the past, inflation concerns, and to a lesser extent quality and supplier viability concerns, affecting some of our imported product suppliers located in China prompted us to source more of our products from lower cost suppliers located in other countries, such as Vietnam and Indonesia.Vietnam. As conditions dictate, we could be forced to make similar transitions in the future. When undertaken, transitions of this type involve significant planning and coordination by and between us and our new suppliers in these countries. Despite our best efforts and those of our new sourcing partners, these transition efforts are likely to result in longer lead times and shipping delays over the short term, which could adversely affect our sales, earnings, financial condition and liquidity. The interruption, inadequacy security failure or integrationsecurity failure of our information systems or information technology infrastructure or the internet or inadequate levels of cyber-insurance could adversely impact our business, ,sales, earnings, financial condition and liquidity.
Our information systems (software) and information technology (hardware) infrastructure platforms and those of third parties who provide these services to us, including internet service providers and third-parties who store data for us on their servers (“the cloud”), facilitate and support every facet of our business, including the sourcing of raw materials and finished goods, planning, manufacturing, warehousing, customer service, shipping, accounting, payroll and human resources. Our systems, and those of third parties who provide services to us, are vulnerable to disruption or damage caused by a variety of factors including, but not limited to: power disruptions or outages; natural disasters or other so-called “Acts of God”; computer system or network failures; viruses or malware; physical or electronic break-ins; the theft of computers, tablets and smart phones utilized by our employees or contractors; unauthorized access, phishing and cyber-attacks. The risk of cyberattacks also includes attempted breaches of contractors, business partners, vendors and other third parties. We have a cybersecurity program designed to protect and preserve the integrity of our information systems. We have experienced and expect to continue to experience actual or attempted cyber-attacks of our information systems or networks; however, none of these actual or attempted cyber-attacks had a material impact on our operations or financial condition. Additionally, while we carry cyber insurance, including insurance for social engineering fraud, the amounts of insurance we carry may be inadequate due either to inadequate limits available from the insurance markets or inadequate coverage purchased. Because cyber threat scenarios are inherently difficult to predict and can take many forms, cyber insurance may not cover certain risks. Further, legislative or regulatory action in these areas is evolving, and we may be unable to adapt our information systems or to manage the information systems of third parties to accommodate these changes. If these information systems or technologies are interrupted or fail, or we are unable to adapt our systems or those of third parties as a result of legislative or regulatory actions, our operations and reputation may be adversely affected, we may be subject to legal proceedings, including regulatory investigations and actions, which could diminish investor and customer confidence which could adversely affect our sales, earnings, financial condition and liquidity. A material part of our sales and accounts receivable are concentrated in a few customers. The loss of several large customers through business consolidations, failures or other reasons could adversely affect our business. Although no customer accounted for more than 10% of our consolidated sales in fiscal 2019, our top five customers accounted for nearly one-third of our fiscal 2019 consolidated sales. Nearly half of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity. The loss of any one or more of these customers could adversely affect our sales, earnings, financial condition and liquidity. The loss of several of our major customers through business consolidations, failures or otherwise, could adversely affect our sales, earnings, financial condition and liquidity and the resulting loss in sales may be difficult or impossible to replace. Amounts owed to us by a customer whose business fails, or is failing, may become uncollectible, and we could lose future sales, any of which could adversely affect our sales, earnings, financial condition and liquidity. 11
We may not be able to collect amounts owed to us. We grant payment terms to most customers ranging from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. Some of our customers have experienced, and may in the future experience, credit-related issues. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment. Should more customers than we anticipate experience liquidity issues, or if payment is not received on a timely basis, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity. Unauthorized disclosure of confidential information provided to us by our customers, employees, or third parties could harm our business. We rely on the internet and other electronic methods to transmit confidential information and we store confidential information on our networks. If there was a disclosure of confidential information by our employees or contractors, including accidental loss, inadvertent disclosure or unapproved dissemination of information, or if a third party were to gain access to the confidential information we possess, our reputation could be harmed, and we could be subject to civil or criminal liability and regulatory actions. A claim that is brought against us, successful or unsuccessful, that is uninsured or under-insured could harm our business, result in substantial costs, divert management attention and adversely affect our sales, earnings, financial condition and liquidity. Our sales and operating results could be adversely affected by product safety concerns. If our product offerings do not meet applicable safety standards or consumers' expectations regarding safety, we could experience decreased sales, increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to regulatory enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns or failure to prevail in private litigation against us could negatively affect our business, sales, earnings, financial condition and liquidity. We incurred significant debt to provide permanent financing for the Shenandoah acquisition and HMI acquisition. We borrowed $60 million for the Home Meridian acquisition in fiscal year 2017 and additional $12 million for the Shenandoah acquisition in fiscal year 2018 with term loans. Principal and interest payments on the borrowed funds were $19.3 million in fiscal 2019 and are expected to be $6.3 million in fiscal 2020 (assuming no interest rate changes).We are subject to interest rate volatility due to the variable interest rates on these term loans. Among other risks, our debt: | ■ | may limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt; |
| ■ | will require a portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of cash flows to fund working capital, capital expenditures, dividend payments and other general corporate purposes; |
| ■ | may result in higher interest expense in the event of increases in market interest rates for both long-term debt as well as any borrowings under our line of credit at variable rates; and |
| ■ | may require that additional terms, conditions or covenants be placed on us. |
We may engage in acquisitions and investments in companies, form strategic alliances and pursue new business lines. These activities could disrupt our business, dilute our earnings per share, decrease the value of our common stock and decrease our earnings and liquidity. We may acquire or invest in businesses such as those that offer complementary products and that we believe offer competitive advantages. However, we may fail to identify significant liabilities or risks that could negatively affect us or result in our paying more for the acquired company or assets than they are worth. We may also have difficulty assimilating and integrating the operations and personnel of an acquired business into our current operations. Acquisitions may disrupt or distract management from our ongoing business. We may pay for future acquisitions using cash, stock, the assumption of debt, or a combination of these. Future acquisitions could result in dilution to existing shareholders and to earnings per share and decrease the value of our common stock. We may pursue new business lines in which we have limited or no prior experience or expertise. These pursuits may require substantial investment of capital and personnel. New business initiatives may fail outright or fail to produce an adequate return, which could adversely affect our earnings, financial condition and liquidity. The implementation of our Enterprise Resource Planning system could disrupt our business.
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We are in the final phase of implementing an Enterprise Resource Planning (ERP) system in our legacy Hooker Furniture business. (HMI operates on a separate ERP platform.) Our ERP system implementation may not result in improvements that outweigh its costs and may disrupt our operations. Our inability to mitigate existing and future disruptions could adversely affect our sales, earnings, financial condition and liquidity. The ERP system implementation subjects us to substantial costs and inherent risks associated with migrating from our legacy systems. These costs and risks could include, but are not limited to:
§ | significant capital and operating expenditures; |
§ | disruptions to our domestic and international supply chains; |
§ | inability to fill customer orders accurately and on a timely basis, or at all; |
§ | inability to process payments to suppliers, vendors and associates accurately and in a timely manner; |
§ | disruption of our internal control structure; |
§ | inability to fulfill our SEC or other governmental reporting requirements in a timely or accurate manner; |
§ | inability to fulfill federal, state and local tax filing requirements in a timely or accurate manner; and |
§ | increased demands on management and staff time to the detriment of other corporate initiatives. |
We may not be able to collect amounts owed to us.
We grant payment terms to most customers ranging from 30 to 60 days and do not generally require collateral. However, in some instances we provide longer payment terms. Some of our customers have experienced, and may in the future experience, credit-related issues. While we perform credit evaluations of our customers, those evaluations may not prevent uncollectible trade accounts receivable. Credit evaluations involve significant management diligence and judgment. Should more customers than we anticipate experience liquidity issues, or if payment is not received on a timely basis, we may have difficulty collecting amounts owed to us by these customers, which could adversely affect our sales, earnings, financial condition and liquidity.
Our new business initiatives could fail to meet growth and profitability targets.
During fiscal 2014, we launched H Contract and Homeware, two new business initiatives which comprise our All Other operating segment. Both businesses require experience and expertise outside of our traditional skillset, so we hired professionals who we believe have the skills and experience to lead them. H Contract has been profitable on an operating profit basis for the last two fiscal years and its net sales have increased; however, there is no guarantee that H Contract’s early successes will continue and that its sales and earnings will continue to grow. Homeware has not yet achieved operating profitability. Consequently, we adjusted Homeware’s strategy during the second half of fiscal 2016. Despite these changes, we may not succeed in growing Homeware into a profitable business and it may fail outright or fail to produce an adequate return. We expect this segment to have a negative impact on our short-term earnings and liquidity as we attempt to grow these businesses. If Homeware fails to become profitable or H Contract’s early successes diminish or stall, our sales, earnings, financial condition and liquidity could be adversely affected.
A disruption affecting our Martinsville and Henry County Virginia warehouses, distribution or administrativedomestic facilities could disrupt our business. Our Martinsvillebusiness.The warehouses in which we store our inventory in Virginia, North Carolina and Henry County Virginia facilitiesCalifornia are critical to our success. Our Martinsville, Virginia warehouses housed approximately 50% of our consolidated inventories at January 31, 2016. During fiscal 2016, approximately 60% of our invoiced sales were shipped out of our Martinsville facilities. Additionally, our corporate and divisional headquarters, which houses all ofhouse our corporate administration, sourcing, sales, finance, merchandising, customer service and trafficlogistics functions for our imported and domestic products isare located in this area.Virginia and North Carolina. Our domestic upholstery manufacturing facilities are located in Virginia and North Carolina. Any disruption affecting our Martinsville areadomestic facilities, for even a relatively short period of time, could adversely affect our ability to ship our imported furniture products and disrupt our business, which could adversely affect our sales, earnings, financial condition and liquidity. Our abilityrecently terminated pension plan could negatively impact our operating results and cash flows. We assumed the liabilities of the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees upon completion of the Home Meridian acquisition on February 1, 2016. No benefits have accrued under the Pension Plan since it was frozen in March 1995. During the fiscal 2019 third quarter, we fully funded the plan by making a $3 million cash contribution as part of a Pension Plan de-risking strategy and moved assets into generally lower risk investments to growpreserve asset value. On January 30, 2019, our Board of Directors approved the termination of the Pension Plan. Pension Plan termination is an eighteen to twenty-four-month process that involves seeking certain approvals from both the IRS and maintain salesthe PBGC. We expect to record pension settlement expenses which could adversely affect our earnings. Additionally, there could be excess costs to terminate the plan and earnings depends onmarket performance could drive down the successful executionvalue of our business strategies. fixed-income investments, which could cause the Pension Plan to lose its funded status and require us to make additional cash contributions, which could negatively affect our earnings and liquidity. See Note 13 on page F-27 for additional information about the Pension Plan.Our other defined benefit retirement plan obligations could negatively impact our operating results and cash flows. We are primarily a residential furniture design, sourcing, marketing and logistics company with domestic upholstery manufacturing capabilities. We are completely dependent on non-U.S. suppliers for all of our casegoods furniture products and a significant portion of our upholstered products. Our ability to grow and maintain sales and earnings depends on: two other defined benefit pension plans (the “Plans”): | §■ | a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation; and the continued correct selection and successful execution and refinementPulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives, assumed upon completion of our overall business strategies and business systems for designing, marketing, sourcing, distributing and servicing our products;the Home Meridian acquisition on February 1, 2016. |
| § | good decisions about product mix and inventory availability targets; |
| § | the enhancement of relationships and business systems that allow us to continue to work more efficiently and effectively with our global sourcing suppliers; and |
| § | the right mix between domestic manufacturing and foreign sourcing for upholstered products. |
Our traditional customer base, independent furniture storesThe recognition of costs and regional chains,liabilities associated with these plans for financial reporting purposes is getting smalleraffected by assumptions made by management and used by actuaries engaged by us to calculate the benefit obligations and the demographic profileexpenses recognized for these plans. The inputs used in developing the required estimates are calculated using a number of assumptions, which represent management’s best estimate of the typical home furnishings consumer is evolving. Therefore,future. The assumptions that have the most significant impact on reported results are (i) the discount rate and (ii) mortality rates. While the plans are frozen and no new participants are being added, we must: | § | identify and adapt to trends in retailing; and |
| § | develop strategies to sell in the channels in which our consumers prefer to shop. |
Allexpect to be impacted by changes in actuarial assumptions of these factorsboth plans, which could adversely affect our ability to growfinancial condition and maintain sales, earnings and liquidity.
See Note 13 on page F-27 for additional information about the Plans.Failure to anticipate or timely respond to changes in fashion and consumer tastes could adversely impact our business. business.Furniture is a styled product and is subject to rapidly changing fashion trends and consumer tastes, as well as to increasingly shorter product life cycles. If we fail to anticipate or promptly respond to these changes we may lose market share or be faced with the decision of whether to sell excess inventory at reduced prices. This could adversely affect our sales, earnings, financial condition and liquidity. Fluctuations in the price, availability or quality of raw materials for our domestically manufactured upholstered furniture could cause manufacturing delays, adversely affect our ability to provide goods to our customers or increase our costs. costs.We use various types of wood, leather, fabric, foam and other filling material, high carbon spring steel, bar and wire stock and other raw materials in manufacturing upholstered furniture. We depend on outside suppliers for raw materials and must obtain sufficient quantities of quality raw materials from these suppliers at acceptable prices and in a timely manner. We do not have long-term supply contracts with our suppliers. Unfavorable fluctuations in the price, quality or availability of required raw materials could negatively affect our ability to meet the demands of our customers. We may not always be able to pass price increases in raw materials through to our customers due to competition and other market pressures. The inability to meet customers’ demands or recover higher costs could adversely affect our sales, earnings, financial condition and liquidity. If demand for our domestically manufactured upholstered furniture declines, we may respond by realigning manufacturing. manufacturing.Our domestic manufacturing operations make only upholstered furniture. A decline in demand for our domestically produced upholstered furniture could result in the realignment of our domestic manufacturing operations and capabilities and the implementation of cost-savingcost-saving measures. These programs could include the consolidation and integration of facilities, functions, systems and procedures. We may decide to source certain products from other suppliers instead of continuing to manufacture them. These realignments and cost-savingcost-saving measures typically involve initial upfront costs and could result in decreases in our near-term earnings before the expected cost savings are realized, if they are realized at all. We may not always accomplish these actions as quickly as anticipated and may not achieve the expected cost savings, which could adversely affect our sales, earnings, financial condition and liquidity. liquidity.We may experience impairment of our long-lived assets, which would decrease our earnings and net worth. Accounting rules require that long-lived assets be tested for impairment when circumstances indicate, but at least annually. At January 31, 2016February 3, 2019, we had $24.2$105.3 million in net long-lived assets, consisting primarily of property, plant and equipment, trademarks, trade names and trade names.goodwill. Our goodwill, some trademarks and tradenames have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes, but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Our definite-lived assets consist of property, plant and equipment and certain intangible assets related to our recent acquisitions and are tested for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. The outcome of impairment testing could result in the write-offwrite-down of all or a portion of the value of these assets. A write-down of our assets would, in turn, reduce our earnings and net worth; factors which may lead toworth. See Notes 9 and 10 for additional write-downs of our long-lived assets include, but are not limited to: | § | A significant decrease in the market value of a long-lived asset; |
| § | A significant adverse change in the extent or manner in which a long-lived asset group is being used, or in its physical condition; |
| § | A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; |
| § | An accumulation of costs significantly in excess of the amount originally expected to acquire or construct a long-lived asset; |
| § | A current period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with a long-lived asset’s use; and |
| § | A current expectation that more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. |
information.We may not be able to maintain or raise prices in response to inflation and increasing costs. Competitive and market forces could prohibit future successful price increases for our products in order to offset increased costs of finished goods, raw materials, freight and other product-related costs, which could decreaseadversely affect our sales, earnings, financial condition and liquidity. Economic downturns could result in decreased sales, earnings and liquidity.
The furniture industry is particularly sensitive to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Home furnishings are generally considered a postponable purchase by most consumers. Economic downturns could affect consumer spending habits by decreasing the overall demand for home furnishings. Changes in interest rates, consumer confidence, new housing starts, existing home sales, the availability of consumer credit and broader national or geopolitical factors have particularly significant effects on our business. A recovery in our sales could lag significantly behind a general recovery in the economy after an economic downturn, due to, among other things, the postponable nature and relatively significant cost of home furnishings purchases. These events could also impact retailers, our primary customers, possibly adversely affecting our sales, earnings, financial condition and liquidity. We may lose market share due to competition. competition.The furniture industry is very competitive and fragmented. We compete with numerous domestic and non-U.S. residential furniture sources. Some competitors have greater financial resources than we have and often offer extensively advertised, well-recognized, branded products. Competition from non-U.S. sources has increased dramatically over the past decade. We may not be able to meet price competition or otherwise respond to competitive pressures, including increases in supplier and production costs. Also, due to the large number of competitors and their wide range of product offerings, we may not be able to continue to differentiate our products (through value and styling, finish and other construction techniques) from those of our competitors. In addition, some large furniture retailers are sourcing directly from non-U.S. furniture factories. Over time, this practice may expand to smaller retailers. As a result, we are continually subject to the risk of losing market share, which could adversely affect our sales, earnings, financial condition and liquidity. The loss of several large customers through business consolidations, failures or other reasons could adversely affect our business.
The loss of several of our major customers through business consolidations, failures or otherwise, could adversely affect our sales, earnings, financial condition and liquidity. Lost sales may be difficult to replace. Amounts owed to us by a customer whose business fails, or is failing, may become uncollectible, and we could lose future sales, any of which could adversely affect our sales, earnings, financial condition and liquidity.
We may incur higher employee costs in the future. We maintain a self-insured healthcare planand workers compensation plans for our employees. We have insurance coverage in place for aggregate claims above a specified amountamounts in any year. While ouryear for both plans. Our healthcare costs in recent years have generally increased at the same rate or greater than the national average, thoseand healthcare costs have increased more rapidly than general inflation in the U.S. economy. Continued inflation in healthcare costs, as well as additional costs we may incur as a result of current or future federal or state healthcare legislation and regulations, could significantly increase our employee healthcare costs in the future. Our workers compensation claims costs have had only a modest impact on our overall results of operations for quite some time; however, these costs may increase in the future without warning. Continued increases in our healthcare costs and increased workers compensation claims costs could adversely affect our earnings, financial condition and liquidity. Our results of operations for any quarter are not necessarily indicative of our results of operations for a full year. Home furnishings sales fluctuate from quarter to quarter due to factors such as changes in economic and competitive conditions, seasonality, weather conditions and changes in consumer order patterns. From time to time, we have experienced, and may continue to experience, volatility with respect to demand for our home furnishing products. The acquisition and integration of Home Meridian may increase that volatility. Accordingly, our results of operations for any quarter are not necessarily indicative of the results of operations to be expected for a full year.
Future costs of complying with various laws and regulations may adversely impact future operating results. Our business is subject to various domestic and international laws and regulations that could have a significant impact on our operations and the cost to comply with such laws and regulations could adversely impact our sales, earnings, financial condition and liquidity. In addition, failure to comply with such laws and regulations, even inadvertently, could produce negative consequences which could adversely impact our operations and reputation. Risks Specific to the Acquisition and Integration of Home Meridian
We may fail to realize all of the anticipated benefits of the Home Meridian acquisition.
While we believe that the Home Meridian acquisition will be accretive to our earnings per share beginning in fiscal 2017, this expectation is based on preliminary estimates which may materially change. While we do not expect to merge operations or change customer-facing services, the success of this acquisition will depend, in part, on our ability to improve each business by sharing best practices in order to lower costs, improve efficiencies and grow sales. There can be no assurance regarding when or the extent to which we will be able to realize these benefits. Achieving the anticipated benefits is subject to a number of uncertainties, including whether the business acquired can be operated in the manner we intend. Events outside of our control could also adversely affect our ability to realize the anticipated benefits from the acquisition. Thus, the integration of Home Meridian’s business may be unpredictable, subject to delays or changed circumstances, and we can give no assurance that the acquired business will perform in accordance with our expectations, or that our expectations with respect to integration or benefits as a result of the acquisition will materialize. Additionally, a major asset acquired in this acquisition was Home Meridian’s existing customer relationships. While we believe that these relationships will continue and result in profitable sales, there can be no assurance that they will.
The anticipated benefits and cost savings of the proposed acquisition may not be realized fully or at all, or may take longer to realize than expected. The integration process could result in the loss of key employees, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies. If the integration is not completed as planned, our ongoing business and financial results may be adversely affected, which could adversely affect our sales, earnings, financial condition and liquidity.
We incurred significant debt to provide permanent financing for the acquisition.
We funded $60 million of the acquisition price with term loans. Acquisition-related principal and interest payments on the borrowed funds are expected to be approximately $7.0 million in fiscal 2017. We are subject to interest rate volatility due to the variable rates of interest on our loans. Among other risks, our debt:
| § | may limit our flexibility to pursue other strategic opportunities or react to changes in our business and the industry in which we operate and, consequently, place us at a competitive disadvantage to competitors with less debt; |
| § | will require a portion of our cash flows from operations to be used for debt service payments, thereby reducing the availability of cash flows to fund working capital, capital expenditures, dividend payments and other general corporate purposes; |
| § | may result in higher interest expense in the event of increases in market interest rates for both long‑term debt as well as any borrowings under our line of credit at variable rates; and
|
| § | may require that additional terms, conditions or covenants be placed on us. |
The intangible assets we expect to record as a result of the acquisition could become impaired.
We expect to account for this acquisition using the acquisition method of accounting, which could result in charges to our earnings that could adversely affect our reported operating results. Under this method, we will allocate the total purchase price to the assets acquired and liabilities assumed from HMI based on their fair values as of February 1, 2016 (the date of the completion of the acquisition) and will record any excess of the purchase price over those fair values as goodwill. To the extent the value of goodwill or intangible assets were to become impaired, we may be required to incur charges relating to the impairment of those assets. Goodwill is tested for impairment annually or whenever events or changes in circumstances indicate impairment may have occurred. If we make changes in our business strategy or if market or other conditions adversely affect operations in any of our businesses, we may be forced to record a non-cash impairment charge, which would reduce our reported assets, net income and shareholders’ equity. If the testing performed indicates that impairment has occurred, we are required to record an impairment charge for the difference between the carrying value of the goodwill and the implied fair value of the goodwill in the period the determination is made. The testing of goodwill for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including: future business operating performance, changes in economic conditions and interest rates, regulatory, industry or market conditions, changes in business operations, or changes in competition. Any changes in key assumptions, or actual performance compared with key assumptions, about our business and its future prospects could affect the fair value of one or more business segments, which may result in an impairment charge which would adversely affect our earnings and financial condition.
We incurred significant acquisition and acquisition‑related costs in connection with this transaction and expect to incur additional acquisition and integration-related costs in fiscal 2017.
Through the end of our 2016 fiscal year, we incurred approximately $1.1 million in deal-related costs and anticipate incurring approximately $1.5 million in additional deal and integration-related costs in fiscal 2017. We could encounter other integration-related costs or other factors, such as the failure to realize benefits anticipated from the proposed transaction, which could negatively impact the projected financial consequences of the acquisition and adversely affect our financial condition and liquidity. Our anticipated costs to achieve the integration of Home Meridian may differ significantly from our current estimates. The integration may place an additional burden on our management and internal resources, and the diversion of management’s attention during the integration process could have an adverse effect on our business, financial condition and expected operating results. Any of these factors could adversely affect our earnings, financial condition and liquidity.
We assumed HMI’s legacy pension plan obligations.
We assumed approximately $9.0 million of HMI’s legacy pension plan obligations on the acquisition date of February 1, 2016. While the plan is frozen and no new participants are being added, we expect to be impacted by the plan’s investment performance, changes in actuarial assumptions and the funded status of the plan, which could adversely affect our financial condition and liquidity. Should we decide to terminate the pension plan in the future, we expect to record settlement expenses against our earnings and contribute a final cash contribution, which could adversely affect our financial condition and liquidity.
Risks Specific to HMI’s Operations or to the Operations of the Combined Entity
As previously mentioned, we completed the acquisition of substantially all of the assets of Home Meridian International (HMI) subsequent to the end of our 2016 fiscal year and we are early into the process of integrating the two companies. The risks outlined above are forward looking, but are largely based on our operations before the completion of the acquisition on February 1, 2016. However, except for the risk factors above that deal with domestic manufacturing and upholstery operations, we believe that the risk factors disclosed represent, in all material respects, most of the risks of the combined companies. However, there are risk factors not detailed above that are either specific to Home Meridian’s operations or different enough from those discussed above to warrant separate or additional disclosure:
A material part of HMI’s sales and accounts receivable are concentrated in a few customers, some of which are existing Hooker customers.
Sixty-percent of HMI’s fiscal 2015 sales were concentrated in ten customers. Hooker sold to six of those ten customers during its 2016 fiscal year and sales to those customers accounted for nearly 12% of Hooker’s fiscal 2016 sales. Two of those ten customers each accounted for over 10% of HMI’s fiscal 2015 sales and both of those customers combined accounted for over 27% of HMI’s total fiscal 2015 sales. Of those two customers, Hooker sold to only one during its 2016 fiscal year and those sales accounted for less than 1% of Hooker’s fiscal 2016 sales. Those same two customers accounted for over 30% of HMI’s accounts receivable at the end of its fiscal year on November 1, 2015. HMI’s results will be included in Hooker’s quarterly and annual fiscal 2017 results; however, we are early into the 2017 fiscal year and therefore unable to determine if the two customers referenced above will account for 10% or more of the combined entity’s sales or accounts receivable for fiscal 2017. However, the loss of one or a combination of those customers, could adversely affect our earnings, financial condition and liquidity.
A disruption affecting Home Meridian’s Madison, NC, Mayodan, NC or Redlands, CA warehouses or its High Point, NC administrative facilities could disrupt our business.
Home Meridian’s domestic warehouses are critical to its success. Its division headquarters houses most of its administration, sourcing, sales, finance, merchandising, customer service and traffic functions. A disruption affecting any or a combination of these facilities, for even a relatively short period of time, could adversely affect its ability to ship its products and disrupt its business, which could adversely affect our sales, earnings, financial condition and liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS None. 15
None.
Set forth below is information with respect to our principal properties at April 15, 2016.19, 2019. We believe all of these properties are well-maintained and in good condition. During fiscal 2016,2019, we estimate our upholstery plants operated at approximately 81%86% of capacity on a one-shift basis. All our production facilities are equipped with automatic sprinkler systems. All facilities maintain modern fire and spark detection systems, which we believe are adequate. We have leased certain warehouse facilities for our distribution and import operations, typically on a short andor medium-term basis. We expect that we will be able to renew or extend these leases or find alternative facilities to meet our warehousing and distribution needs at a reasonable cost. All facilities set forth below are active and operational, representing approximately 3.53.9 million square feet of owned space, leased space or properties utilized under third-party operating agreements. Location | | Segment Use | | Primary Use | | Approximate Size in Square Feet | | Owned or Leased | Martinsville, Va. | | All segments | | | Corporate Headquarters | | 43,000 | | | Owned | Martinsville, Va. | All segments | HB, AO | | Distribution and Imports | | 580,000 | | | Owned | Martinsville, Va. | All segments | HB, AO | | Customer Support Center | | 146,000 | | | Owned | Martinsville, Va. | All segments | HB, AO | | Distribution | | 628,000 | | | Leased (1) | High Point, N.C. | All segments | HB, AO | | Showroom | | 80,000 | | | Leased (2) | Cherryville, N.C. | Upholstery | AO | | Manufacturing Supply Plant | 53,000 | 53,000 | | Owned (3) | Hickory, N.C. | | UpholsteryAO | | Manufacturing | Manufacturing | 91,000 | 91,000 | | | Owned (3) | Hickory, N.C. | | UpholsteryAO | | | Manufacturing and Offices | | 36,400 | | | Leased (3) (4) | Bedford, Va. | | UpholsteryAO | | | Manufacturing and Offices | | 327,000 | | | Owned (5) | High Point, N.C. | * | HM | | Showroom | | 77,00092,750 | | | Leased (6) (13) | High Point, N.C. | * | HM | | Office | | 23,796 | | | Leased (6) (7) | High Point, N.C. | * | HM | | Warehouse | | 16,90010,400 | | | Leased (6) (8) | Madison, N.C. | | *HM | | Warehouse | Warehouse | 500,000 | 500,000 | | | Leased (6) (9) | Mayodan, N.C. | | *HM | | Warehouse | Warehouse | 235,144 | 100,000 | | | Leased (6) (10) | Mayodan, N.C. | | *HM | | Warehouse | Warehouse | 200,000 | 235,144 | | | Leased (6) (11) | Redlands, CA. | | *HM | | Warehouse | Warehouse | 327,790 | 327,790 | | | Leased (6) (12) | Ho Chi Minh City, VietnamVN | *HM | | | Office and Warehouse | | 4,893 | | | Leased (6) (14) | Haining, China | | *HM | | Warehouse | Warehouse | 5,920 | 5,920 | | | Leased (6) (12) | Haining, China | | *HM | | Office | Office | 1,690 | 1,690 | | | Leased (6) (15) | Dongguan, China | * | HM | | Office | | 1,571 | | | Leased (6) (16) | Dongguan, China | | HB | | Office | | 1,855 | | | | Leased | (1) Lease expires March 31, 2021.Thu Dau Mot, VN | | HB | | Office | | 1,722 | | Leased | (2) Lease expires October 31, 2016.Valdese, N.C. | | AO | | Manufacturing and warehousing | | 102,905 | | Leased | (3) Comprise the principal properties of Bradington-Young LLC.Mt. Airy, N.C. | | AO | | Manufacturing and warehousing | | 104,150 | | Leased | (4) Lease expires December 15, 2016Martinsville, Va. | | AO | | Manufacturing and provides for 2 two-year extensions at our election.warehousing | | 92,766 | | Leased | (5) Comprise the principal properties of Sam Moore Furniture LLC.High Point, N.C. | | AO | | (6) Comprise the principal properties of Home Meridian International. | Office | | | (7) Lease expires March 31, 2022.18,346 | | | | | | | | (8) Lease expires May 31, 2016. | | | | | | | | | (9) Lease expires August 31, 2016. | | | | | | (10) Lease expires May 31, 2020 and provides for two twelve-month extensions at our election. | | | | (11) Lease expires October 31, 2020. | | | | | | (12) Lease expires December 31, 2016. | | | | | | (13) Lease expires October 31, 2023. | | | | | | (14) Lease expires March 15, 2018. | | | | | | (15) Lease expires September 17, 2016. | | | | | | (16) Lease expires September 30, 2016. | | | | | | | | | | | | | | | | | * The completion of the acquisition of HMI's assets occurred subsequent to the end of our 2016 fiscal year. | Consequently, we have not yet determined the operating segments of the combined entity. | | | Leased |
HB=Hooker Branded, HM=Home Meridian, AO=All Other Set forth below is information regarding principal properties we utilize that are owned and operated by third parties. Location | | | | | | | | Location | | Segment Use | | Primary Use | | Approximate Size in Square Feet | | Guangdong, China | HB | Casegoods | Distribution | Distribution | 210,000 | 210,000 (1) | Ho Chi Minh City, VietnamVN | HB | Casegoods | Distribution | Distribution | 25,000 | 25,000 (2) | | | | | | | | (1) This property is subject to an operating agreement that expires on July 31, 2016. | Renewal is automatic unless either party gives notice to terminate 120 days prior to expiration. | | | | | | | | (2) This property is subject to an operating agreement that may be canceled by either party | upon 45 days written notice and is canceled if no storage or other services are performed | under the contract for 180 days. |
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
HOOKER FURNITURE CORPORATION
Hooker Furniture’s executive officers and their ages as of April 15, 201619, 2019 and the calendar year each joined the Company are as follows: | Name | | Age | | Position | | Year Joined Company | | Paul B. Toms, Jr. | | 61 | | Chairman and Chief Executive Officer | | 1983 | | Paul A. Huckfeldt | | 58 | | Chief Financial Officer and | | 2004 | | | | | | Senior Vice President - Finance and Accounting | | | | Michael W. Delgatti, Jr. | | 62 | | President - Hooker Furniture Corporation | | 2009 | | Anne M. Jacobsen | | 54 | | Senior Vice President-Administration | | 2008 | | George Revington | | 69 | | President and Chief Operating Officer - Home Meridian | | 2016 |
Name | | Age | | Position | | Year Joined Company | Paul B. Toms, Jr. | | 64 | | Chairman and Chief Executive Officer | | 1983 | Paul A. Huckfeldt | | 61 | | Chief Financial Officer and | | 2004 | | | | | Senior Vice President - Finance and Accounting | | | Anne M. Jacobsen | | 57 | | Chief Administration Officer | | 2008 | D. Lee Boone | | 56 | | Co-President - Home Meridian Segment | | 2016 | Michael W. Delgatti, Jr. | | 65 | | President - Hooker Domestic Upholstery & Emerging Channels | | 2009 | Jeremy R. Hoff | | 45 | | President - Hooker Branded Segment | | 2017 | Douglas Townsend | | 52 | | Co-President - Home Meridian Segment | | 2016 |
Paul B. Toms, Jr. has been Chairman and Chief Executive Officer since December 2000 and also served as President for most of the period from November 2006 to August 2011. Mr. Toms was President and Chief Operating Officer from December 1999 to December 2000, Executive Vice President - Marketing from 1994 to December 1999, Senior Vice President - Sales and Marketing from 1993 to 1994, and Vice President - Sales from 1987 to 1993. Mr. Toms joined the Company in 1983 and has been a Director since 1993.
Paul A. Huckfeldt has been Senior Vice President - Finance and Accounting since September 2013 and Chief Financial Officer since January 2011. Mr. Huckfeldt served as Vice President – Finance and Accounting from December 2010 to September 2013, Corporate Controller and Chief Accounting Officer from January 2010 to January 2011, Manager of Operations Accounting from March 2006 to December 2009 and led the Company’s Sarbanes-Oxley implementation and subsequent compliance efforts from April 2004 to March 2006.
Anne M. Jacobsen has been Chief Administration Officer since July 2018. Ms. Jacobsen served as Senior Vice President – Administration from January 2014 to June 2018, Vice President- HR and Administration from January 2011 to January 2014 and Vice President-Human Resources from November 2008 to January 2011. Ms. Jacobsen joined the Company in January of 2008 as Director of Human Resources. D. Lee Boone has been Co-President of the Home Meridian Segment since June 2018. Mr. Boone joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016 as President of Samuel Lawrence Furniture, a division of Home Meridian International. Prior to that, Mr. Boone served as President of Legacy Classic Furniture from 2006 to 2012. Michael W. Delgatti, Jr. has been President of Hooker Domestic Upholstery and Emerging Channel since February 2014.April 2018. Mr. Delgatti served as President- Hooker Furniture Corporation from February 2014 to January 2017, President – Hooker Upholstery from August 2011 to January 2014 and Executive Vice-President of Corporate Sales from September 2012 to January 2014. Mr. Delgatti joined the Company in January of 2009 as Executive Vice-President of Hooker Upholstery.
Anne M. Jacobsen Jeremy R. Hoff has been Senior Vice President- AdministrationPresident of the Hooker Branded Segment since January 2014. Ms. JacobsenApril 2018. Mr. Hoff joined the Company in JanuaryAugust of 20082017 as DirectorPresident of Human Resources andHooker Upholstery. Prior to that, Mr. Hoff served as President of Theodore Alexander USA from December 2015 to August 2017 and Senior Vice President- H RPresident of sales at A.R.T. Furniture Inc. from April 2015 to November 2015 and AdministrationVice-President of Sales from JanuaryMarch 2011 to January 2014 and Vice President-Human Resources from November 2008 to January 2011.
George Revingtonjoined the Company as President and Chief Operating OfficerApril 2015.Douglas Townsend has been Co-President of the Home Meridian divisionSegment since June 2018. Mr. Townsend joined the Company upon the acquisition of Home Meridian’s assets by the Company in February 2016.2016 as Senior Vice President of U.S. Operations and Chief Operating Officer of both Samuel Lawrence Hospitality and the Clubs Division. Prior to that, Mr. Revington served asthe acquisition, he was Executive Vice President and Chief Executive Officer of Home Meridian International since its creation in 2006.
from October 2011 to February 2016.Hooker Furniture Corporation
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDERSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our stock is traded on the NASDAQ Global Select Market under the symbol “HOFT”. The table below sets forth the high and low sales prices per share for our common stock and the dividends per share we paid with respect to our common stock for the periods indicated. | | | Sales Price Per Share | | | Dividends | | | | | High | | | Low | | | Per Share | | | November 2, 2015 - January 31, 2016 | | $ | 30.51 | | | $ | 24.00 | | | $ | 0.10 | | | August 3, - November 1, 2015 | | | 26.50 | | | | 22.16 | | | | 0.10 | | | May 4, - August 2, 2015 | | | 27.30 | | | | 23.50 | | | | 0.10 | | | February 2 - May 3, 2015 | | | 26.67 | | | | 17.57 | | | | 0.10 | | | | | | | | | | | | | | | | | November 3, 2014 - February 1, 2015 | | $ | 18.77 | | | $ | 14.25 | | | $ | 0.10 | | | August 4, - November 2, 2014 | | | 16.00 | | | | 14.24 | | | | 0.10 | | | May 5, - August 3, 2014 | | | 17.40 | | | | 13.60 | | | | 0.10 | | | February 3 - May 4, 2014 | | | 16.24 | | | | 13.64 | | | | 0.10 | |
As of January 31, 2016,February 3, 2019, we had approximately 5,3005,700 beneficial shareholders. We currently expect that future regular quarterly dividends will be declared and paid in the months of March, June, September and December. Although we presently intend to continue to declare regular cash dividends on a quarterly basis for the foreseeable future, the determination as to the payment and the amount of any future dividends will be made by the Board of Directors on a quarterly basis and will depend on our then-current financial condition, capital requirements, results of operations and any other factors then deemed relevant by the Board of Directors.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
During the fiscal 2013 first quarter, our Board of Directors authorized the repurchase of up to $12.5 million of the Company’s common shares. During fiscal 2013, we used an aggregate of $671,000 to purchase 57,700 shares of our stock at an average price of $11.63 per share. No shares were purchased duringhave been repurchased since fiscal 2014, 2015 or fiscal 2016.2013. Approximately $11.8 million remains available under the board’s authorization as of January 31, 2016.February 3, 2019. For additional information regarding this repurchase authorization, see the “Share Repurchase Authorization” section in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following graph compares cumulative total shareholder return for the Company with a broad performance indicator, the Russell 2000® Index, and an industry index, the Household Furniture Index, for the period from January 30, 2011February 2, 2014 to January 31, 2016.  February 3, 2019.
(1) | The graph shows the cumulative total return on $100 invested at the beginning of the measurement period in our common stock or the specified index, including reinvestment of dividends. |
(2) | The Russell 2000® Index, prepared by Frank Russell Company, measures the performance of the 2,000 smallest companies out of the 3,000 largest U.S. companies based on total market capitalization. |
(3) | Household Furniture Index as prepared by Zacks Investment Research, Inc. consists of companies under SIC Codes 2510 and 2511, which includes home furnishings companies that are publicallypublicly traded in the United States or Canada. At January 31, 2016,February 3, 2019, Zacks Investment Research, Inc. reported that these two SIC Codes consisted of Bassett Furniture Industries,Nova Lifestyle, Inc., Dorel Industries,La-Z-Boy, Inc., Ethan Allen Interiors,Leggett & Platt, Inc., Flexsteel Industries, Inc., Hooker Furniture Corporation, La-Z-Boy, Inc.Sleep Number Corp., Leggett & Platt, Inc., Natuzzi SPA-ADR, Nova Lifestyle, Inc., Select Comfort Corporation, Stanley Furniture Company,Kimball International, Inc., Luvu Brands, Inc., KimballTempur Sealy International, Inc., Compass Diversified Holdings, Natuzzi Spa, Purple Innovation, Inc., Bassett Furniture Industries, Inc., Ethan Allen Interiors, Inc., HG Holdings, Inc., Horrison Resources, Inc., The Rowe Companies, and Tempur Sealy. Dorel Industries. |
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for each of our last five fiscal years has been derived from our audited, consolidated financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, including the related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report. Additionally, we face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors”, above. If any or a combination of these risks and uncertainties were to occur, the information below may not be fully indicative of our future financial condition or results of operations.
| | | Fiscal Year Ended (1) | | | | | January 31, | | | February 1, | | | February 2, | | | February 3, | | | January 29, | | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | | | (In thousands, except per share data) | | | Income Statement Data: | | | | | | | | | | | | | | | | | Net sales | | $ | 246,999 | | | $ | 244,350 | | | $ | 228,293 | | | $ | 218,359 | | | $ | 222,505 | | | Cost of sales | | | 178,311 | | | | 181,550 | | | | 173,568 | | | | 165,813 | | | | 173,642 | | | Gross profit | | | 68,688 | | | | 62,800 | | | | 54,725 | | | | 52,546 | | | | 48,863 | | | Selling and administrative expenses (2) | | | 44,426 | | | | 43,752 | | | | 42,222 | | | | 39,606 | | | | 40,375 | | | Goodwill and intangible asset impairment charges (3) | | | - | | | | - | | | | - | | | | - | | | | 1,815 | | | Operating income | | | 24,262 | | | | 19,048 | | | | 12,503 | | | | 12,940 | | | | 6,673 | | | Other income (expense), net | | | 197 | | | | 350 | | | | (35 | ) | | | 53 | | | | 272 | | | Income before income taxes | | | 24,459 | | | | 19,398 | | | | 12,468 | | | | 12,993 | | | | 6,945 | | | Income taxes | | | 8,274 | | | | 6,820 | | | | 4,539 | | | | 4,367 | | | | 1,888 | | | Net income | | | 16,185 | | | | 12,578 | | | | 7,929 | | | | 8,626 | | | | 5,057 | | | | | | | | | | | | | | | | | | | | | | | | | Per Share Data: | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 1.50 | | | $ | 1.17 | | | $ | 0.74 | | | $ | 0.80 | | | $ | 0.47 | | | Diluted earnings per share | | $ | 1.49 | | | $ | 1.16 | | | $ | 0.74 | | | $ | 0.80 | | | $ | 0.47 | | | Cash dividends per share | | | 0.40 | | | | 0.40 | | | | 0.40 | | | | 0.40 | | | | 0.40 | | | Net book value per share (4) | | | 14.46 | | | | 13.30 | | | | 12.57 | | | | 12.19 | | | | 11.78 | | | Weighted average shares outstanding (basic) | | | 10,779 | | | | 10,736 | | | | 10,722 | | | | 10,745 | | | | 10,762 | | | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 53,922 | | | $ | 38,663 | | | $ | 23,882 | | | $ | 26,342 | | | $ | 40,355 | | | Trade accounts receivable | | | 28,176 | | | | 32,245 | | | | 29,393 | | | | 28,272 | | | | 25,807 | | | Inventories | | | 43,713 | | | | 44,973 | | | | 49,016 | | | | 49,872 | | | | 34,136 | | | Working capital | | | 111,462 | | | | 100,871 | | | | 94,142 | | | | 92,200 | | | | 89,534 | | | Total assets | | | 181,653 | | | | 170,755 | | | | 155,481 | | | | 155,823 | | | | 149,171 | | | Long-term debt | | | - | | | | - | | | | - | | | | - | | | | - | | | Shareholders' equity | | | 156,061 | | | | 142,909 | | | | 134,803 | | | | 131,045 | | | | 127,113 | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended (1) | | | | February 3, | | | January 28, | | | January 29, | | | January 31, | | | February 1, | | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | | | | | | (In thousands, except per share data) | | Income Statement Data: | | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 683,501 | | | $ | 620,632 | | | $ | 577,219 | | | $ | 246,999 | | | $ | 244,350 | | Cost of sales | | | 536,014 | | | | 485,815 | | | | 451,098 | | | | 178,311 | | | | 181,550 | | Casualty loss (2) | | | 500 | | | | - | | | | - | | | | - | | | | - | | Gross profit | | | 146,987 | | | | 134,817 | | | | 126,121 | | | | 68,688 | | | | 62,800 | | Selling and administrative expenses (3) | | | 91,928 | | | | 87,279 | | | | 83,186 | | | | 43,959 | | | | 43,464 | | Intangible asset amortization (4) | | | 2,384 | | | | 2,084 | | | | 3,134 | | | | - | | | | - | | Operating income (3) | | | 52,675 | | | | 45,454 | | | | 39,801 | | | | 24,729 | | | | 19,336 | | Other income (expense), net (3) | | | 369 | | | | 1,566 | | | | 349 | | | | (206 | ) | | | 115 | | Interest Expense, net | | | 1,454 | | | | 1,248 | | | | 954 | | | | 64 | | | | 53 | | Income before income taxes | | | 51,590 | | | | 45,772 | | | | 39,196 | | | | 24,459 | | | | 19,398 | | Income taxes | | | 11,717 | | | | 17,522 | | | | 13,909 | | | | 8,274 | | | | 6,820 | | Net income | | | 39,873 | | | | 28,250 | | | | 25,287 | | | | 16,185 | | | | 12,578 | | | | | | | | | | | | | | | | | | | | | | | Per Share Data: | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.19 | | | $ | 1.50 | | | $ | 1.17 | | Diluted earnings per share | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.18 | | | $ | 1.49 | | | $ | 1.16 | | Cash dividends per share | | | 0.57 | | | | 0.50 | | | | 0.42 | | | | 0.40 | | | | 0.40 | | Net book value per share (5) | | | 22.37 | | | | 19.53 | | | | 17.16 | | | | 14.46 | | | | 13.30 | | Weighted average shares outstanding (basic) (6) | | | 11,759 | | | | 11,633 | | | | 11,531 | | | | 10,779 | | | | 10,736 | | | | | | | | | | | | | | | | | | | | | | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 11,435 | | | $ | 30,915 | | | $ | 39,792 | | | $ | 53,922 | | | $ | 38,663 | | Trade accounts receivable | | | 112,557 | | | | 92,803 | | | | 92,578 | | | | 28,176 | | | | 32,245 | | Inventories | | | 105,204 | | | | 84,459 | | | | 75,303 | | | | 43,713 | | | | 44,973 | | Working capital | | | 170,516 | | | | 153,162 | | | | 147,856 | | | | 111,462 | | | | 100,871 | | Total assets | | | 369,716 | | | | 350,058 | | | | 318,696 | | | | 181,653 | | | | 170,755 | | Long-term debt (including current maturities) (7) | | | 35,508 | | | | 53,425 | | | | 47,710 | | | | - | | | | - | | Shareholders' equity | | | 263,176 | | | | 229,460 | | | | 197,927 | | | | 156,061 | | | | 142,909 | |
(1) | (1) | Our fiscal years end on the Sunday closest to January 31. The fiscal years presented above all had 52 weeks, except for the current fiscal year ended February 3, 2013,2019, which had 53 weeks. |
(2) | (2) | Represents the insurance deductible for a casualty loss experienced at one of our Hooker Branded segment facilities in fiscal 2019. |
| (3) | Amounts for fiscal 2018, 2017, 2016 and 2015 have been adjusted to reflect the reclassifications from Selling and administrative expenses (“S&A”) to Other income (expense), net of certain benefits costs as a result of adopting ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This accounting standard requires bifurcation of net benefit cost such that all benefit costs except service cost are reported outside of operating costs. Amounts reclassified from S&A to Other income (expense), net were ($30,000), $581,000, $467,000 and $288,000 for fiscal 2014 included $2.12018, 2017, 2016 and 2015, respectively. |
| (4) | We recorded amortization expense of $2.4 million of startup costs pre-tax ($1.41.8 million, or $0.13$0.16 per share after tax) for our H Contract and Homeware business initiatives. |
(3) | Based on our annual impairment analyses, we recorded intangible asset impairment charges in fiscal 2012, $1.8 million pretax ($1.1 million after tax or $0.10 per share)2019 on our Bradington-Young trade name.amortizable intangible assets recorded as a result of Home Meridian and Shenandoah acquisitions. |
(4) | (5) | Net book value per share is derived by dividing “shareholders’ equity” by the number of common shares issued and outstanding, excluding unvested restricted shares, all determined as of the end of each fiscal period. |
| (6) | Weighted average outstanding shares outstanding changed materially as a result of issuing 716,910 shares of common stock to the designees of HMI as partial consideration for the Home Meridian acquisition and 176,018 shares of common stock to the shareholders of SFI as partial consideration for the Shenandoah acquisition. |
| (7) | Long-term debt (including current maturities) consists of term loans incurred to fund a portion of the Home Meridian and Shenandoah acquisitions. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should beAs you read in conjunction withManagement’s Discussion and Analysis, please refer to the selected financial data and the consolidated financial statements, including the related notes, contained elsewhere in this annual report. We especially encourage users of this reportyou to familiarize themselvesyourself with: | §■ | All of our recent public filings made with the Securities and Exchange Commission (“SEC”). Our public filings made with the SEC which are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com; |
| §■ | The forward-looking statements disclaimer contained inprior to Item 1 of this report, which describe the significant risks and uncertainties that could cause actual results to differ materially from those forward-looking statements made in this report, including those contained in this section of our annual report on Form 10-K; |
| §■ | The company-specific risks found in Item 1A1A. “Risk Factors” of this report. This section contains critical information regarding significant risks and uncertainties that we face. If any of these risks materialize, our business, financial condition and future prospects could be adversely impacted; and |
| §■ | Our commitments and contractual obligations and off-balance sheet arrangements described on page 3634 and in Note 1518 on page F-27F-39 of this report. These sections describe commitments, contractual obligations and off-balance sheet arrangements, some of which are not reflected in our consolidated financial statements. |
In Management’s Discussion and Analysis, we analyze and explain the annual changes in some specific line items in the consolidated financial statements for fiscal 2019 compared to fiscal 2018 and for fiscal 2018 compared to fiscal 2017. We also provide information regarding the performance of each of our operating segments and All Other. Unless otherwise indicated, references to the Company in this discussion“Company”, "we," "our" or "us" refer to the CompanyHooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. Unless otherwise indicated, amounts shown in tables are in thousands, except for share and per share data.
Our fiscal years end onAll references to the Sunday closest“Hooker”, “Hooker Division”, “Hooker Brands” or “traditional Hooker” divisions or companies refer to January 31. In some years (generally once every six years) the fourth quarter will be fourteen weeks longcurrent components of our Hooker Branded segment and the fiscal year will consistdomestic upholstery operations contained in All Other: Bradington-Young, Sam Moore, and Shenandoah Furniture.References to the “Shenandoah acquisition” refer to our acquisition of fifty-three weeks. For example,substantially all of the 2013 fiscal year that endedassets 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 3, 2013 was a 53-week fiscal year. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted above.
The financial statements filed as part of this annual report on Form 10-K include the:
| § | fifty-two week period that began February 2, 2015 and ended on January 31, 2016 (fiscal 2016); |
| § | fifty-two week period that began February 3, 2014 and ended on February 1, 2015 (fiscal 2015); and |
| § | fifty-two week period that began February 4, 2013 and ended on February 2, 2014 (fiscal 2014). |
Nature of Operations
1, 2016.Overview Hooker Furniture Corporation, (the “Company”, “we,” “us” and “our”) is a home furnishings marketing, design and logistics company offering worldwide sourcing of residential and contract casegoods and upholstery, as well as domestically-produced custom leather and fabric-upholstered furniture. We were 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 10five largest publicly traded furniture sources, based on 20152017 shipments to U.S. retailers, according to a 20152018 survey published byFurniture Today, a leading trade publication. We believe that consumer tastes and channels in which they shop for furniture are evolving at a key resource for residential woodrapid pace and metal furniture (commonly referredwe continue to as “casegoods”) and upholstered furniture. Our major casegoods product categories include accents, home office, dining, bedroom and home entertainment furniture under the Hooker Furniture brand. Our residential upholstered seating companies include Bradington-Young, a specialist in upscale motion and stationary leather furniture and Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization. An extensive selection of designs and formats along with finish and cover options in each ofchange to meet these product categories makes us a comprehensive resource for retailers primarily targeting the upper-medium price range. We also market a line of imported leather upholstery under the Hooker Upholstery trade name. We also work directly with several large customers to develop private-label, unbranded products exclusively for those customers. Our H Contract division supplies upholstered seating and casegoods to upscale senior living facilities throughout the country, working with designers specializing in the contract industry to provide functional furniture for senior living facilities that meets the style and comfort expectations of today’s retirees. Homeware is an online-only brand that is sold through leading international e-commerce retailers. It supplies unique chairs, sofas and ottomans designed to be assembled in minutes by the consumer with no tools or hardware required. demands.ForOur 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 core product line, our principal customerstraditional businesses are both traditional and online retailers of residential home furnishings that are broadly dispersed throughout the United States and in thirty-six other countries around the globe. Our customers include independent furniture stores, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains. They are serviced by over 60 independent North American sales representatives and 8 foreign sales representatives. H Contract’s customers include designers, design firms, industry dealers and distributors and senior living facilities throughout the United States. It has its own sales force of independent multi-line sales representatives. Homeware’s customers are primarily online home furnishings retailers.
On January 5, 2016, we entered into an asset purchase agreement withunder-represented. Consequently, Hooker acquired Home Meridian International, Inc. (“HMI”) to acquire substantially all of HMI’s assets in exchange for $85 million in cash and approximately $20.3 million in unregistered shares of our common stock, of which $5.3 million was due to a working capital adjustment provided for in the asset purchase agreement. We completed the acquisition on February 1, 2016 subsequentand Shenandoah Furniture on September 29, 2017.We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs, and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins. This acquisition has provided the Home Meridian segment’s leadership with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus. We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel. Executive Summary- Fiscal 2019 Results of Operations The Shenandoah acquisition closed during the third quarter of fiscal 2018. Consequently, All Other’s prior year results only included four-months of Shenandoah’s results beginning on September 29, 2017 through the end of our 2016 fiscal year and thus none of the results of HMI are included in our fiscal 2016 results. We believe this acquisition will more than double the size of the Company2018 which ended on aJanuary 28, 2018. Consolidated net sales basisfor fiscal 2019 increased 10.1% or $62.9 million to $683.5 million as compared to fiscal 2018 due to sales increases in both of our reportable segments and consequently, make us one of the top five public sources for the U.S. furniture market. See note 18 to our consolidated financial statements for additional information.
For financial reporting purposes, we are organized into three operating segments – casegoods furniture, upholstered furniture and all other.
Overview
Consumer home furnishings purchases are driven by an array of factors, including general economic conditions such as:
| § | availability of consumer credit; |
| § | energy and other commodity prices; and |
| § | housing and mortgage markets; |
All Other, as well as lifestyle-driven factors such as changes in: | § | household formation and turnover. |
Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demandone additional week of sales in the current fiscal year. Home Meridian net sales increased by adjusting inventory purchases from suppliers. This import model requires constant vigilance$22.4 million or 6.1% in fiscal 2019. Hooker Branded segment net sales increased 7.2% or $12.0 million due to a larger investmentstrong sales in inventorythe imported casegoods and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures,upholstery business. All Other net sales increased by 32.3% 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 has been and can be adversely affected by economic downturns. Our upholstery segment operations have been profitable since fiscal 2013, with overall profitability improving each year, primarily$28.6 million mostly due to improving profitabilitythe absence of Shenandoah’s results in our domestic upholstery, which lagged the import operations during the economic downturn but are now seeing the impactfirst eight months of cost reduction effortsfiscal 2018, as well as steady sales growth at Bradington Young and improving sales on their operations.
Fiscal 2016 Executive Summary-Results of Operations
All segments reported improved operating profitabilityH Contract.Consolidated net income for fiscal 2019 increased $11.6 million or over 40% as compared to the prior year, even on generally modest sales increases. Consolidated gross profit increased 9.4% or $5.9 million primarily due to decreased discounting, reduced returnshigher earnings on increased sales, as well as the tax rate reduction due to the recently enacted Tax Cuts and allowances and lower quality costs inJob Act of 2017, along with $1.8 million income tax expense to value our casegoods segment; improved operating efficiencies and decreased contract manufacturing in our upholstery segment; and increased net sales in our All Other segment, due primarily to a 70% net sales increase at H Contract. Flat selling and administrative expenses (“S&A”) as a percentage of net sales were due primarily to increased net sales. S&A increased by $674,000 in absolute terms due primarily to $1.2 million in acquisition-related costs recognizeddeferred tax assets recorded in the fourth quarter of fiscal year which were mostly offset by other decreases2018. As discussed in S&A discussed below. Consolidated operating income increased $5.2 million or about 28% to nearly 10%greater detail under “Results of net sales due to these factors. Our casegoods segment generated an operating margin of about 12% and upholstery segment operating income more than doubled. Net income increased $3.6 million or nearly 30%. ■ | Gross profit. Consolidated gross profit increased $12.2 million or 9.0% primarily due to sales increases in the Hooker Branded segment and All Other, partially offset by a $500,000 casualty loss recorded in the third quarter, which represented the deductible on our property insurance policy. Gross profit decreased slightly as a percentage of net sales as compared to the prior year period due principally to increased core cost of goods sold and warehousing and distribution expenses in the Home Meridian segment. |
■ | Selling and administrative expenses. Consolidated selling and administrative (S&A) expenses increased in absolute terms due to the addition of Shenandoah’s operations and due to higher compensation, benefits, and selling expenses. These increases were partially offset by a company-owned life insurance gain recognized in the first quarter of fiscal 2019, the absence of Shenandoah acquisition-related costs in the current year and a customer write-off in the prior year. S&A expenses decreased as a percentage of net sales due to higher sales. |
■ | Intangible asset amortization expense. Consolidated intangible amortization expense increased $300,000 due to the addition of Shenandoah’s acquisition-related intangibles, partially offset by the absence of amortization expense on some shorter-lived Shenandoah acquisition-related intangible assets which were recorded in the fiscal 2018 second-half. |
■ | Operating income. In fiscal 2019, consolidated operating income increased $7.2 million or 15.9% and as a percentage of net sales compared to fiscal 2018 due to the factors discussed above and in greater detail in the analysis below. |
Review We were pleased with our operating results for the year, despite the imposition of tariffs on goods imported from China in the fourth quarter of the year. Net sales increased 10.1% due to both organic growth of about 6% over fiscal 2018 and the addition of a full year of sales at Shenandoah included in All Other. Our diversification strategy also proved its value as we faced challenges in some business units, while others returned to healthy growth after periods of slowness. Net income improved over 40% compared to the prior year. Like many US corporate taxpayers, net income was favorably impacted by the Tax and Jobs Act of 2017, but we are also pleased to report a 15.9% improvement in operating income for the year, with significant increases in both the Hooker Branded segment and in All Other, which includes our domestically-produced upholstery divisions and H Contract furnishings for senior living facilities. Hooker Branded segment net sales increased $12.0 million or 7.2% in fiscal 2019, with Hooker Casegoods reporting an upper single digit sales increase and Hooker Upholstery reporting a double-digit sales increase. We attribute this growth to reenergized segment leadership and well-received product offerings. Hooker Branded segment orders increased in the single digits for the year and benefitted from increased sales into advantaged distribution channels and what we believe to be exceptional product offerings. The Home Meridian segment finished fiscal 2019 with a $22.4 million or 6.1% net sales increase, despite a slow start to fiscal 2019 due to vendor interruptions in Asia and decreased sales due to quality challenges with certain products that surfaced in late fiscal 2019. Home Meridian’s 6.1% net sales increase was driven by net sales increases in the hospitality and e-commerce distribution channels, partially offset by weakness in other distribution channels. The majority of the Home Meridian segment’s sales are “container direct” sales which are sales shipped from our Asian manufacturing partners directly to our retailers rather than stocked in our US warehouses. This fact prevented us from building inventory levels before the 10% tariff became effective. Increased product cost resulting from the tariff and unfavorable customer mix negatively impacted the Home Meridian segment’s gross margin. All Other net sales increased $28.6 million or 32.3% primarily due to the inclusion of Shenandoah’s full year sales, and to a lesser extent due to steady sales growth at Bradington-Young and H Contract. In fiscal 2019, Bradington Young orders and net sales increased by 7.2% and 8.2%, respectively, due to increased sales of higher-priced luxury-motion products. H Contract continued to grow with orders up over 12% for the year and backlog up 73% compared to prior year end as of the end of fiscal 2019. These increases were partially offset by decreased sales at Sam Moore. Sam Moore management implemented cost reductions and better controlled operating expenses, which yielded increased operating margins in fiscal 2019. Our fiscal 2019 operating results also benefited from $1.0 million gain on company-owned life insurance recognized during the first quarter of fiscal 2019 and the absence of $700,000 Shenandoah-acquisition related costs recorded in prior year period, partially offset by $500,000 casualty loss related to a roof-collapse at one of our Martinsville area warehouses which represented the deductible on our property insurance policy, recorded in the second quarter of fiscal 2019 and increased intangible asset amortization expense due to the addition of Shenandoah acquisition related intangible assets. Our cash and cash equivalents decreased nearly $20 million to $11.4 million as of February 3, 2019. We strategically increased our inventory levels to support sales growth and in an effort to import product ahead of the imposition of the tariffs during the fourth quarter. We also paid $19.3 million principal and interest including $10 million unscheduled payment to pay off the Shenandoah acquisition related term loans and paid $6.7 million in dividends to our shareholders. In the third quarter of fiscal 2019, our Board of Directors approved the increase of our quarterly dividend to $0.15 per share. With an aggregate $27.7 million available under our Existing Revolver to fund working capital and pending cash receipts from increased trade receivables at year-end, we are confident in our financial condition.
The following table sets forth the percentage relationship to net sales of certain items for the annual periods included in the consolidated statements of income: | | | Fifty-two | | | Fifty-two | | | Fifty-two | | | | | weeks ended | | | weeks ended | | | weeks ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | Cost of sales | | | 72.2 | | | | 74.3 | | | | 76.0 | | | Gross profit | | | 27.8 | | | | 25.7 | | | | 24.0 | | | Selling and administrative expenses | | | 18.0 | | | | 17.9 | | | | 18.5 | | | Operating income | | | 9.8 | | | | 7.8 | | | | 5.5 | | | Other income, net | | | 0.1 | | | | 0.2 | | | | 0.0 | | | Income before income taxes | | | 9.9 | | | | 7.9 | | | | 5.5 | | | Income taxes | | | 3.3 | | | | 2.8 | | | | 2.0 | | | Net income | | | 6.6 | | | | 5.1 | | | | 3.5 | |
| | Fifty-three | | | Fifty-two | | | Fifty-two | | | | weeks ended | | | weeks ended | | | weeks ended | | | | February 3, | | | January 28, | | | January 29, | | | | 2019 | | | 2018 | | | 2017 | | Net sales | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | Cost of sales | | | 78.5 | | | | 78.3 | | | | 78.2 | | Gross profit | | | 21.5 | | | | 21.7 | | | | 21.8 | | Selling and administrative expenses | | | 13.4 | | | | 14.1 | | | | 14.4 | | Intangible asset amortization | | | 0.3 | | | | 0.3 | | | | 0.5 | | Operating income | | | 7.7 | | | | 7.3 | | | | 6.9 | | Other income (expense), net | | | 0.1 | | | | 0.3 | | | | 0.1 | | Interest expense, net | | | 0.2 | | | | 0.2 | | | | 0.2 | | Income before income taxes | | | 7.5 | | | | 7.4 | | | | 6.8 | | Income taxes | | | 1.7 | | | | 2.8 | | | | 2.4 | | Net income | | | 5.8 | | | | 4.6 | | | | 4.4 | |
Fiscal 20162019 Compared to Fiscal 2015
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Casegoods | | $ | 155,106 | | | | 62.8 | % | | $ | 153,882 | | | | 63.0 | % | | $ | 1,224 | | | | 0.8 | % | | Upholstery | | | 84,090 | | | | 34.0 | % | | | 86,362 | | | | 35.3 | % | | | (2,272 | ) | | | -2.6 | % | | All Other | | | 8,033 | | | | 3.3 | % | | | 5,025 | | | | 2.1 | % | | | 3,008 | | | | 59.9 | % | | Intercompany Eliminations | | | (230 | ) | | | | | | | (919 | ) | | | | | | | 689 | | | | | | | Consolidated | | $ | 246,999 | | | | 100.0 | % | | $ | 244,350 | | | | 100.0 | % | | $ | 2,649 | | | | 1.1 | % |
| | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Hooker Branded | | $ | 178,710 | | | | 26.2 | % | | $ | 166,754 | | | | 26.9 | % | | $ | 11,956 | | | | 7.2 | % | Home Meridian | | | 387,825 | | | | 56.7 | % | | | 365,472 | | | | 58.9 | % | | | 22,353 | | | | 6.1 | % | All Other | | | 116,966 | | | | 17.1 | % | | | 88,406 | | | | 14.2 | % | | | 28,560 | | | | 32.3 | % | Consolidated | | $ | 683,501 | | | | 100.0 | % | | $ | 620,632 | | | | 100.0 | % | | $ | 62,869 | | | | 10.1 | % |
Unit Volume and Average Selling Price Unit Volume | | FY19 % Increase/ -Decrease vs. FY18 | | Average Selling Price | | FY19 % Increase/ -Decrease vs. FY18 | | | | | | | | | | | | Hooker Branded | | | 6.5 | % | Hooker Branded | | | 0.2 | % | Home Meridian | | | 3.5 | % | Home Meridian | | | 3.7 | % | All Other | | | -3.9 | % | All Other | | | 6.7 | % | Consolidated | | | 3.5 | % | Consolidated | | | 2.9 | % |
*Shenandoah is excluded from All Other in the Unit Volume and ASP tables above since only four months of its results was included in fiscal 2018. Consequently, we believe including its fiscal 2019 results would skew All Other’s results and reduce the usefulness of the table above. | Unit Volume | | FY16 % Increase vs. FY15 | | | Average Selling Price ("ASP") | | FY16 % Increase vs. FY15 | | | | | | | | | | | | | Casegoods | | | -3.7 | % | | Casegoods | | | 4.1 | % | | Upholstery | | | -5.2 | % | | Upholstery | | | 2.7 | % | | All other | | | 98.0 | % | | All other | | | -19.7 | % | | Consolidated | | | -1.5 | % | | Consolidated | | | 2.0 | % |
Consolidated net sales increased $62.9 million or 10.1% compared to fiscal 2018. Fiscal 2019 had 53 weeks while fiscal 2018 and 2017 had 52 weeks. The increaseadditional week in fiscal 2019 increased consolidated net sales for fiscal 2016 was principally due to increased unit volumeby $13.4 million based on the average net sales per shipping day in our All Other segment due to significantly increased sales at H Contract and higher ASP in our casegoods segment due to lower product discounting. We believe the decreased unit volume in our casegoods segment was due to:
table below. | §■ | Slowing retail furnitureHooker Branded segment net sales increased $12.0 million or 7.2% primarily due to higher sales volume as the result of strong orders and expanded channels of distribution. Good in-stock positions on best-sellers supported steady shipments. Net sales also benefitted from favorable advertising costs, product mix, and increased sales of Hooker Upholstery sectionals, which had higher ASP. |
| ■ | Home Meridian segment net sales increased $22.4 million or 6.1% driven by higher unit volumes and ASP. We raised our selling prices in response to the previously mentioned tariff and increased product costs. Sales volume increased in four out of five business units due to increased sales into emerging channels. The net sales increase was partially offset by a sales decline in traditional channels and unfavorable returns and allowances in the second halffourth quarter of 2016;fiscal 2019. |
| §■ | Lingering product availability challenges dueAll Other’s net sales increased $28.6 million or 32.3% compared to expanding lead times and late deliveries of certain of our more popular October 2014 market introductions in that segment during the fiscal 2016 first quarter. We received most2018. Most of the October market introductions and delivered standing ordersincrease was attributable to customers duringa full year of Shenandoah’s net sales being included in fiscal 2019 (as compared to only four months in the fiscal 2016 second quarter; however, late deliveries resulted in delayed reorders even on products which have retailed well, which impacted shipments into the fiscal 2016 second half; and |
| § | Outages of key component products that prevented orders for certain suites from shipping during the fiscal 2016 third quarter. |
Unit volume decreases in our upholstery segment were primarily caused by:
| § | decreases at Hooker upholstery due to pressure on motion upholstery pricingprior year) and to a lesser extent, exiting lower marginstrong sales programs at the expense of net sales;Bradington-Young and |
| § | decreases H Contract, partially offset by a sales decrease at Sam MooreMoore. ASP increased due to increased sales of higher-priced Bradington-Young luxury motion products. All Other’s unit volume decreased due to the effects of discontinuing unprofitable sales programsvolume decline at the expense of net sales and lingering post-ERP implementation inefficiencies during the second half of fiscal 2016.Sam Moore. |
Because we report on a fiscal year that ends on the Sunday closest to January 31st of each year, the 2019 fiscal year was one week longer than the comparable 2018 fiscal year. The following table presents average net sales per shipping day in thousands for the 2019 and 2018 fiscal years: | | | Average Net Sales Per Shipping Day | | | | | | | | | Fifty-three weeks ended | | | Fifty-two weeks ended | | | % | | | | | February 3, 2019 | | | January 28, 2018 | | | Change | | Hooker Branded | | $ | 698 | | | $ | 664 | | | | 5.1 | % | Home Meridian | | | 1,515 | | | | 1,456 | | | | 4.0 | % | All Other | | | 457 | | | | 352 | | | | 29.8 | % | Consolidated | | $ | 2,670 | | | $ | 2,472 | | | | 8.0 | % | | | | | | | | | | | | | | | Shipping Days | | | 256 | | | | 251 | | | | | |
Gross Profit | | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Segment Net Sales | | | | | | | % Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 58,122 | | | | 32.5 | % | | $ | 53,007 | | | | 31.8 | % | | $ | 5,115 | | | | 9.6 | % | Home Meridian | | | 62,850 | | | | 16.2 | % | | | 62,325 | | | | 17.1 | % | | | 525 | | | | 0.8 | % | All Other | | | 26,015 | | | | 22.2 | % | | | 19,485 | | | | 22.0 | % | | | 6,530 | | | | 33.5 | % | Consolidated | | $ | 146,987 | | | | 21.5 | % | | $ | 134,817 | | | | 21.7 | % | | $ | 12,170 | | | | 9.0 | % |
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 47,558 | | | | 30.7 | % | | $ | 44,868 | | | | 29.2 | % | | $ | 2,690 | | | | 6.0 | % | | Upholstery | | | 18,852 | | | | 22.4 | % | | | 16,489 | | | | 19.1 | % | | | 2,363 | | | | 14.3 | % | | All Other | | | 2,252 | | | | 28.0 | % | | | 1,465 | | | | 29.2 | % | | | 787 | | | | 53.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intercompany Eliminations | | | 26 | | | | | | | | (22 | ) | | | | | | | 48 | | | | | | | Consolidated | | $ | 68,688 | | | | 27.8 | % | | $ | 62,800 | | | | 25.7 | % | | $ | 5,888 | | | | 9.4 | % |
Consolidated gross profit increased in the fiscal 2016, primarily due to: | § | Improved casegoods segment gross profit due to decreased discounting due to a better product mix, lower cost of goods sold due to declining freight costs, which more than offset vendor price increases, and lower returns and allowances and other quality related costs as a result of better product quality; |
| § | Improved upholstery segment gross profit due to operating efficiencies such as decreased contract manufacturing and lower medical claims expense in that segment; and |
| § | Improved All Other segment gross profit due primarily to increased net sales at H Contract. |
Sellingabsolute terms by $12.2 million and Administrative Expenses
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 29,049 | | | | 18.7 | % | | $ | 27,582 | | | | 17.9 | % | | $ | 1,467 | | | | 5.3 | % | | Upholstery | | | 12,833 | | | | 15.3 | % | | | 13,618 | | | | 15.8 | % | | | (785 | ) | | | -5.8 | % | | All Other | | | 2,544 | | | | 31.7 | % | | | 2,552 | | | | 50.8 | % | | | (8 | ) | | | -0.3 | % | | Consolidated | | $ | 44,426 | | | | 18.0 | % | | $ | 43,752 | | | | 17.9 | % | | $ | 674 | | | | 1.5 | % |
Flat consolidated S&A expensesdecreased slightly as a percentage of net sales werein fiscal 2019. | ■ | Hooker Branded segment gross profit increased in absolute terms and as a percentage of net sales due primarily to higher sales and lower product costs. Hooker Branded gross profit also benefited from favorable customer mix, driven by growth of ecommerce sales. The improved margin was negatively impacted by higher product costs, increased warehousing and freight costs due to increased inventory levels and a $500,000 casualty loss we recognized early this year. |
| ■ | Home Meridian segment gross profit increased slightly in absolute terms due to additional sales, but decreased as a percentage of net sales. Lower-margin orders due to unfavorable customer mix, inflation of product cost due to the implementation of the 10% tariff and higher product costs negatively impacted Home Meridian’s gross profit. |
| ■ | All Other gross profit increased in absolute terms primarily due to the addition of a full year of Shenandoah’s results in fiscal 2019. Bradington Young and H Contract combined also contributed $1.0 million to gross profit increase, due to strong sales in these divisions. Despite a sales decline at Sam Moore, its gross profit stayed essentially flat in absolute terms and increased as a percentage of net sales. All Other gross profit increased as a percentage of net sales due to moderately lower direct labor and material costs. |
Selling and Administrative Expenses | | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Segment Net Sales | | | | | | | % Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 32,854 | | | | 18.4 | % | | $ | 30,868 | | | | 18.5 | % | | $ | 1,986 | | | | 6.4 | % | Home Meridian | | | 42,688 | | | | 11.0 | % | | | 43,164 | | | | 11.8 | % | | | (476 | ) | | | -1.1 | % | All Other | | | 16,386 | | | | 14.0 | % | | | 13,247 | | | | 15.0 | % | | | 3,139 | | | | 23.7 | % | Consolidated | | $ | 91,928 | | | | 13.4 | % | | $ | 87,279 | | | | 14.1 | % | | $ | 4,649 | | | | 5.3 | % |
Consolidated selling and administrative expenses increased net sales and the recognition of $1.1 million in acquisition-related costs in casegoods segment S&A. Consolidated S&A increased by $674,000 in absolute terms due primarily due to the acquisition-related costs, which were partially offset by other decreases in S&A, such as bad debts and banking expenses. Upholstery segment S&A decreased primarily due to lower selling expenses due to decreased net sales and lower banking and bad debt expenses. Selling and administrative expenses in our All Other segment decreased despite a net sales increase in that segment, as our H Contract and Homeware businesses have each progressed beyond the startup phase.
Operating Income
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 18,509 | | | | 11.9 | % | | $ | 17,286 | | | | 11.2 | % | | $ | 1,223 | | | | 7.1 | % | | Upholstery | | | 6,020 | | | | 7.2 | % | | | 2,871 | | | | 3.3 | % | | | 3,149 | | | | 109.7 | % | | All Other | | | (293 | ) | | | -3.6 | % | | | (1,087 | ) | | | -21.6 | % | | | 794 | | | | 73.0 | % | | Intercompany Eliminations | | | 26 | | | | | | | | (22 | ) | | | | | | | 48 | | | | | | | Consolidated | | $ | 24,262 | | | | 9.8 | % | | $ | 19,048 | | | | 7.8 | % | | $ | 5,214 | | | | 27.4 | % |
Operating income increased for fiscal 2016 compared to the prior year both as a percentage of net sales and in absolute terms, due to the factors discussed above.
Income Taxes
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Consolidated income tax expense | | $ | 8,274 | | | | 3.3 | % | | $ | 6,820 | | | | 2.8 | % | | $ | 1,454 | | | | 21.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective Tax Rate | | | 33.8 | % | | | | | | | 35.2 | % | | | | | | | | | | | | |
We recorded income tax expense of $8.3 million during fiscal 2016, compared to $6.8 million for fiscal 2015, due primarily to higher taxable income. The effective income tax rates for the two fiscal years were 33.8% and 35.2% respectively. The decrease in effective rate is primarily due to the domestic production deduction as well as a decrease in uncertain tax positions.
Net Income and Earnings Per Share
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Consolidated | | $ | 16,185 | | | | 6.6 | % | | $ | 12,578 | | | | 5.1 | % | | $ | 3,607 | | | | 28.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 1.49 | | | | | | | $ | 1.16 | | | | | | | | | | | | | |
Fiscal 2015 Compared to Fiscal 2014
Net Sales
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Casegoods | | $ | 153,882 | | | | 63.0 | % | | $ | 143,802 | | | | 63.0 | % | | $ | 10,080 | | | | 7.0 | % | | Upholstery | | | 86,362 | | | | 35.3 | % | | | 83,027 | | | | 36.4 | % | | $ | 3,335 | | | | 4.0 | % | | All Other | | | 5,025 | | | | 2.1 | % | | | 1,487 | | | | 0.7 | % | | $ | 3,538 | | | | 237.9 | % | | Intercompany Eliminations | | | (919 | ) | | | | | | | (23 | ) | | | | | | $ | (896 | ) | | | | | | Consolidated | | $ | 244,350 | | | | 100.0 | % | | $ | 228,293 | | | | 100.0 | % | | $ | 16,057 | | | | 7.0 | % |
| Unit Volume | | FY15 % Increase vs. FY14 | | | Average Selling Price | | FY15 % Increase vs. FY14 | | | | | | | | | | | | | Casegoods | | | -3.8 | % | | Casegoods | | | 11.5 | % | | Upholstery | | | -2.3 | % | | Upholstery | | | 6.6 | % | | All other | | | 234.2 | % | | All other | | | 2.9 | % | | Consolidated | | | -1.5 | % | | Consolidated | | | 9.3 | % |
The increase in consolidated net sales in fiscal 2015 was primarily due to higher average selling prices in all operating segments, partially offset by lower casegoods and upholstery segment unit volume. Average selling price increased due to increased sales of products in the ‘best’ segment of our ‘better-best’ product assortment, as well as reduced casegoods discounting, which was a result of significant improvements in inventory management which reduced the amount of excess and obsolete inventory sold during the year and the discounts required to move those products. Unit volume decreases in our casegoods segment were primarily due to reduced sales of off-priced products, as well as reduced sales of the lower-priced Opus Designs and Envision products, as we exit those product lines. Upholstery net sales increased due to net sales gains at both Sam Moore and Bradington-Young, which were due primarily to higher average selling prices, partially offset by lower unit volume. We believe that the all other segment percentages shown are of limited use since the businesses in this segment are starting from a very low base and just completed their first full fiscal year in operation in fiscal 2015.
Gross Profit
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 44,868 | | | | 29.2 | % | | $ | 38,762 | | | | 27.0 | % | | $ | 6,106 | | | | 15.8 | % | | Upholstery | | | 16,489 | | | | 19.1 | % | | | 15,393 | | | | 18.5 | % | | | 1,096 | | | | 7.1 | % | | All Other | | | 1,465 | | | | 29.2 | % | | | 588 | | | | 39.5 | % | | | 877 | | | | 149.1 | % | | Intercompany Eliminations | | | (22 | ) | | | | | | | (18 | ) | | | | | | | (4 | ) | | | | | | Consolidated | | $ | 62,800 | | | | 25.7 | % | | $ | 54,725 | | | | 24.0 | % | | $ | 8,075 | | | | 14.8 | % |
Consolidated gross profit increased, primarily due to:
| § | decreased casegoods segment discounting, partially offset by increased returns and allowances;
|
| § | a $1.1 million gross profit increase in our upholstery segment due primarily to higher net sales and reduced manufacturing costs; and
|
| § | a substantial increase in net sales for our H Contract business initiative as that business completes its first full year in operation and begins to establish itself in the contract furniture industry.
|
Selling and Administrative Expenses
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 27,582 | | | | 17.9 | % | | $ | 26,612 | | | | 18.5 | % | | $ | 970 | | | | 3.6 | % | | Upholstery | | | 13,618 | | | | 15.8 | % | | | 13,480 | | | | 16.2 | % | | | 138 | | | | 1.0 | % | | All Other | | | 2,552 | | | | 50.8 | % | | | 2,130 | | | | 143.3 | % | | | 422 | | | | 19.8 | % | | Consolidated | | $ | 43,752 | | | | 17.9 | % | | $ | 42,222 | | | | 18.5 | % | | $ | 1,530 | | | | 3.6 | % |
Casegoods segment selling and administrative expensesbut decreased as a percentage of net sales in fiscal 2019. | ■ | Hooker Branded segment S&A expenses increased in absolute terms and was primarily driven by higher compensation costs due to increased headcount, higher employee medical costs, and higher bonus and selling expenses due to increased sales and increased income. These increases were partially offset by a $1.0 million gain on company-owned life insurance recognized during the fiscal 2019 first quarter and the absence of $700,000 Shenandoah-acquisition related costs recorded in prior year period. Hooker Branded segment S&A expenses decreased as a percentage of net sales due to higher net sales. |
| ■ | Home Meridian segment S&A expenses decreased in absolute terms and as a percentage of net sales due to decreased bonus expense due to lower sales and earnings as compared to budget, decreased selling expenses on lower-margin orders, and lower bad debt expense in the current year due to the absence of a customer balance written off during the prior year period. These decreases were partially offset by increased employee compensation and benefits expenses. |
| ■ | All Other S&A expenses increased in absolute terms due primarily to the inclusion of a full year of Shenandoah’s operations in fiscal 2019. The increase was also driven by higher compensation, higher employee medical costs and higher professional services due to increased compliance costs. Sam Moore S&A expenses decreased compared to the prior year period due to lower sales and better spending control. |
Intangible Asset Amortization | | | Fifty-three Weeks Ended | | | | | | | Fifty-two Weeks Ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Intangible asset amortization | | $ | 2,384 | | | | 0.3 | % | | $ | 2,084 | | | | 0.3 | % | | $ | 300 | | | | 14.4 | % |
Intangible asset amortization expense was higher in the fiscal 2019 due to the addition of Shenandoah acquisition-related amortization expense for the full year. The increase was partially offset by the short amortization period of certain short-lived Shenandoah acquisition-related intangible assets which was recorded in the fiscal 2018. See Note 10. Intangible Assets and Goodwill for additional information about our amortizable intangible assets. Operating Income | | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | %Segment Net Sales | | | | | | | %Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 25,269 | | | | 14.1 | % | | $ | 22,139 | | | | 13.3 | % | | $ | 3,130 | | | | 14.1 | % | Home Meridian | | | 18,828 | | | | 4.9 | % | | | 17,828 | | | | 4.9 | % | | | 1,000 | | | | 5.6 | % | All Other | | | 8,578 | | | | 7.3 | % | | | 5,487 | | | | 6.2 | % | | | 3,091 | | | | 56.3 | % | Consolidated | | $ | 52,675 | | | | 7.7 | % | | $ | 45,454 | | | | 7.3 | % | | $ | 7,221 | | | | 15.9 | % |
Operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2019 compared to the same prior-year period due to the factors discussed above. Interest Expense, net | | | Fifty-three Weeks Ended | | | | | | | Fifty-two Weeks Ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Interest expense, net | | $ | 1,454 | | | | 0.2 | % | | $ | 1,248 | | | | 0.2 | % | | $ | 206 | | | | 16.5 | % |
Consolidated interest expense in fiscal 2019 increased primarily due to higher interest rates on our variable-rate term loans, partially offset by the $10 million unscheduled loan payment made on the New Unsecured Term Loan in the first quarter of fiscal 2019. Income Taxes | | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Consolidated income tax expense | | $ | 11,717 | | | | 1.7 | % | | $ | 17,522 | | | | 2.8 | % | | $ | (5,805 | ) | | | -33.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective Tax Rate | | | 22.7 | % | | | | | | | 38.3 | % | | | | | | | | | | | | |
We recorded income tax expense of $11.7 million for fiscal 2019 compared to $17.5 million for the same prior year period. The effective tax rates for the fiscal 2019 and 2018 were 22.7% and 38.3%, respectively. Our effective tax rate was lower in fiscal 2019 as a result of the recently enacted Tax Cuts and Jobs Act of 2017 as well as the absence of $1.8 million for the re-measurement of deferred tax assets and liabilities recorded in the fourth quarter of fiscal 2018, partially offset by increased state income taxes. We adopted ASU 2014-09 and ASU 2018-02 in the first quarter of fiscal 2019. The adoptions resulted in the reclassification of $120,000 from federal tax payable and $111,000 from Accumulated Other Comprehensive Income, both to retained earnings. See Note 2 “Summary of Significant Accounting Policies” for additional information on the adoptions of these accounting standards. Net Income and Earnings Per Share | | | Fifty-three weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | $ Change | | | % Change | | Net Income | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Consolidated | | $ | 39,873 | | | | 5.8 | % | | $ | 28,250 | | | | 4.6 | % | | $ | 11,623 | | | | 41.1 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 3.38 | | | | | | | $ | 2.42 | | | | | | | | | | | | | |
Fiscal 2018 Compared to Fiscal 2017 The Shenandoah acquisition closed on September 29, 2017. Consequently, Shenandoah’s results are not included in our results prior to September 30, 2017. Additionally, fiscal 2018 and 2017 results have been recast based on the re-composition of our operating segments during the 2018 fourth quarter. Net Sales | | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Hooker Branded | | $ | 166,754 | | | | 26.9 | % | | $ | 158,685 | | | | 27.5 | % | | $ | 8,069 | | | | 5.1 | % | Home Meridian | | | 365,472 | | | | 58.9 | % | | | 344,635 | | | | 59.7 | % | | | 20,837 | | | | 6.0 | % | All Other | | | 88,406 | | | | 14.2 | % | | | 73,899 | | | | 12.8 | % | | | 14,507 | | | | 19.6 | % | Consolidated | | $ | 620,632 | | | | 100.0 | % | | $ | 577,219 | | | | 100.0 | % | | $ | 43,413 | | | | 7.5 | % |
Unit Volume and Average Selling Price Unit Volume | | FY18 % Increase/ -Decrease vs. FY17 | | Average Selling Price | | FY18 % Increase/ -Decrease vs. FY17 | | | | | | | | | | | | Hooker Branded | | | 5.3 | % | Hooker Branded | | | 0.0 | % | Home Meridian | | | 14.8 | % | Home Meridian | | | -7.4 | % | All Other | | | 19.5 | % | All Other | | | -0.5 | % | Consolidated | | | 13.8 | % | Consolidated | | | -5.4 | % |
Consolidated net sales butincreased in all reportable segments in fiscal 2018, led by increases in the Home Meridian segment and in All Other. Nearly 80% of All Other’s net sales increase was due to inclusion of Shenandoah’s post-acquisition sales in the last four months of the 2018 fiscal year. The increases in consolidated unit sales were partially offset by a decline in consolidated average selling prices (ASP). The Home Meridian segment’s unit volume increased primarily due to increased sales to mega and e-commerce accounts, which experienced significant year-over-year sales increases. The decrease in Home Meridian segment ASP was attributable to customer mix and growth in ecommerce sales, which tend to be lower priced products. Hooker Branded segment unit volume increased due to sales growth at Hooker Upholstery and increased Hooker Casegoods shipments in the fourth quarter. Unit volume in All Other increased primarily due to the inclusion of Shenandoah’s post-acquisition sales, and to a lesser extent, increased sales at Bradington-Young. Gross Profit | | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Segment Net Sales | | | | | | | % Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 53,007 | | | | 31.8 | % | | $ | 51,653 | | | | 32.6 | % | | $ | 1,354 | | | | 2.6 | % | Home Meridian | | | 62,325 | | | | 17.1 | % | | | 57,289 | | | | 16.6 | % | | | 5,036 | | | | 8.8 | % | All Other | | | 19,485 | | | | 22.0 | % | | | 17,179 | | | | 23.2 | % | | | 2,306 | | | | 13.4 | % | Consolidated | | $ | 134,817 | | | | 21.7 | % | | $ | 126,121 | | | | 21.8 | % | | $ | 8,696 | | | | 6.9 | % |
Consolidated gross profit increased in absolute terms primarilyand stayed flat as percentage of net sales in fiscal year 2018 due to increased: | § | commission expense due to higher sales; |
| § | bonus expense due to higher earnings;increased net sales and gross profit in both reportable segments and in All Other. Home Meridian segment gross profit increased both in absolute terms and |
| § | bad debts expense due to the write-off of a customer account during the period. |
These increases were partially offset by decreased:
| § | professional services due to lower compliance costs; and |
| § | salaries and benefits expense due to the retirement of an executive in early fiscal 2015 and decreases in medical claims expense and increases in the cash surrender value of Company-owned life insurance. |
Upholstery segment selling and administrative expenses decreased as a percentage of net sales primarily due to increased net sales butand countermeasures management implemented to improve the margin. All Other gross profit increased due primarily to the addition of Shenandoah’s results. Hooker Branded segment gross profit increased due to net sales increases, lower product costs and a one-time vendor concession due to a prior year quality issue at Hooker Upholstery, partially offset by decreased Hooker casegoods gross profit due to increased cost of goods sold and returns and allowances.Selling and Administrative Expenses | | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Segment Net Sales | | | | | | | % Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 30,868 | | | | 18.5 | % | | $ | 31,182 | | | | 19.7 | % | | $ | (314 | ) | | | -1.0 | % | Home Meridian | | | 43,164 | | | | 11.8 | % | | | 39,468 | | | | 11.5 | % | | | 3,696 | | | | 9.4 | % | All Other | | | 13,247 | | | | 15.0 | % | | | 12,536 | | | | 17.0 | % | | | 711 | | | | 5.7 | % | Consolidated | | $ | 87,279 | | | | 14.1 | % | | $ | 83,186 | | | | 14.4 | % | | $ | 4,093 | | | | 4.9 | % |
Consolidated selling and administrative (S&A) expenses increased in absolute terms primarily due to increased: | § | bad debt expense due to the write-off of a customer account during the period; and |
| § | benefits expense due to higher medical claims expense. |
higher compensation, benefits and bonus expenses, the addition of Shenandoah’s operations for the last four months of our fiscal year and $800,000 in Shenandoah acquisition-related costs in the current year. These increases were partially offset by decreased: | § | advertising supplies due to better cost management; and |
| § | professional services due to reduced manufacturing-related consulting. |
All otherthe absence of $1.2 million in Home Meridian acquisition-related costs from the prior year. Home Meridian segment selling and administrativeS&A expenses increased primarily due to completing its first full year of operations, which includedhigher compensation and bonus expense on improved earnings, increased spending on salaries, wages and benefits and marketing expenses as we grow these new business initiatives out of their start-up phases, and higher commissions and other variable costsprofessional services due to increased sales.
Operating Income
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Segment Net Sales | | | | | | % Segment Net Sales | | | | | | | | | Casegoods | | $ | 17,286 | | | | 11.2 | % | | $ | 12,150 | | | | 8.4 | % | | $ | 5,136 | | | | 42.3 | % | | Upholstery | | | 2,871 | | | | 3.3 | % | | | 1,913 | | | | 2.3 | % | | | 958 | | | | 50.1 | % | | All Other | | | (1,087 | ) | | | -21.6 | % | | | (1,542 | ) | | | -103.7 | % | | | 455 | | | | -29.5 | % | | Intercompany Eliminations | | | (22 | ) | | | | | | | (18 | ) | | | | | | | (4 | ) | | | | | | Consolidated | | $ | 19,048 | | | | 7.8 | % | | $ | 12,503 | | | | 5.5 | % | | $ | 6,545 | | | | 52.3 | % |
Operating income increased for fiscal 2015 comparedcompliance costs and higher bad debt expense due to the prior yearwrite-off of a customer balance during fiscal 2018. All Other S&A expense increased in absolute terms but decreased as a percentage of net sales. The increase was attributable to the inclusion of Shenandoah expenses, partially offset by decreased S&A at Sam Moore, due primarily to lower selling expenses, and at Homeware due to its closure in 2018. Hooker Branded segment S&A decreased in both absolute terms and as a percentage of net sales, due to the absence of approximately $1.2 million in HMI acquisition-related expenses and lower bad debts expense, partially offset by the inclusion of approximately $800,000 in Shenandoah acquisition-related costs, increased salaries and benefits expense, and increased selling expenses at Hooker Upholstery due to higher sales.Intangible Asset Amortization | | | Fifty-two Weeks Ended | | | | | | | Fifty-two Weeks Ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Intangible asset amortization | | $ | 2,084 | | | | 0.3 | % | | $ | 3,134 | | | | 0.5 | % | | $ | (1,050 | ) | | | 100.0 | % |
Intangible asset amortization expense was higher in the prior year period due to the short amortization period of some of Home Meridian’s acquisition-related intangible assets. The decrease was partially offset by intangible asset amortization expense recognized on Shenandoah acquisition-related intangibles. See Note 10. Intangible Assets for additional information on our amortizable intangible assets. Operating Income | | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | %Segment Net Sales | | | | | | | %Segment Net Sales | | | | | | | | | | Hooker Branded | | $ | 22,139 | | | | 13.3 | % | | $ | 20,472 | | | | 12.9 | % | | $ | 1,667 | | | | 8.1 | % | Home Meridian | | | 17,828 | | | | 4.9 | % | | | 14,687 | | | | 4.3 | % | | | 3,141 | | | | 21.4 | % | All Other | | | 5,487 | | | | 6.2 | % | | | 4,642 | | | | 6.3 | % | | | 845 | | | | 18.2 | % | Consolidated | | $ | 45,454 | | | | 7.3 | % | | $ | 39,801 | | | | 6.9 | % | | $ | 5,653 | | | | 14.2 | % |
Operating profitability increased both in absolute terms and as a percentage of net sales in fiscal 2018 compared to the same prior-year period due to the factors discussed above. Interest Expense, net | | | Fifty-two Weeks Ended | | | | | | | Fifty-two Weeks Ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Interest expense, net | | $ | 1,248 | | | | 0.2 | % | | $ | 954 | | | | 0.2 | % | | $ | 294 | | | | 30.8 | % |
Consolidated interest expense in fiscal year 2018 increased primarily due to increases in the interest rates on our variable-rate term loans and interest expense on the new term loan in connection with the Shenandoah acquisition.
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Consolidated income tax expense | | $ | 6,820 | | | | 2.8 | % | | $ | 4,539 | | | | 2.0 | % | | $ | 2,281 | | | | 50.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective Tax Rate | | | 35.2 | % | | | | | | | 36.4 | % | | | | | | | | | | | | |
| | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | | | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Consolidated income tax expense | | $ | 17,522 | | | | 2.8 | % | | $ | 13,909 | | | | 2.4 | % | | $ | 3,613 | | | | 26.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Effective Tax Rate | | | 38.3 | % | | | | | | | 35.5 | % | | | | | | | | | | | | |
We recorded income tax expense of $6.8$17.5 million during fiscal 2015,2018, compared to $4.6$13.9 million for fiscal 2014,2017, due primarily to higher taxable income.additional tax expense of $1.8 million for the re-measurement of deferred tax assets and liabilities as the result of the Tax Cuts and Jobs Act. The effective income tax rates for the two fiscal years were 35.2%38.3% and 36.4%35.5%, respectively. The lowerOur effective income tax rate was higher in fiscal 2015 was2018 due to a smallerthe Tax Act impact of certain permanent differences due to higher taxable income.
and proceeds received on officer life insurance in fiscal 2017 that did not recur in fiscal 2018.Net Income and Earnings Per Share
| | | Fifty-two weeks ended | | | Fifty-two weeks ended | | | | | | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | $ Change | | | % Change | | | | | | | | % Net Sales | | | | | | % Net Sales | | | | | | | | | Consolidated | | $ | 12,578 | | | | 5.1 | % | | $ | 7,929 | | | | 3.5 | % | | $ | 4,649 | | | | 58.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per share | | $ | 1.16 | | | | | | | $ | 0.74 | | | | | | | | | | | | | |
| | | Fifty-two weeks ended | | | | | | | Fifty-two weeks ended | | | | | | | | | | | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | $ Change | | | % Change | | Net Income | | | | | | % Net Sales | | | | | | | % Net Sales | | | | | | | | | | Consolidated | | $ | 28,250 | | | | 4.6 | % | | $ | 25,287 | | | | 4.4 | % | | $ | 2,963 | | | | 11.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 2.42 | | | | | | | $ | 2.18 | | | | | | | | | | | | | |
Financial Condition, Liquidity and Capital Resources
Balance Sheet and Working Capital
The following chart shows changes in our total assets, current assets, current liabilities, net working capital and working capital ratio at January 31, 2016 compared to February 1, 2015:
| | | Balance Sheet and Working Capital | | | | | January 31, 2016 | | | February 1, 2015 | | | $ Change | | | | | | | | | | | | | | Total Assets | | $ | 181,653 | | | $ | 170,755 | | | $ | 10,898 | | | | | | | | | | | | | | | | | Cash | | $ | 53,922 | | | $ | 38,663 | | | $ | 15,259 | | | Trade Receivables | | | 28,176 | | | | 32,245 | | | | (4,069 | ) | | Inventories | | | 43,713 | | | | 44,973 | | | | (1,260 | ) | | Prepaid Expenses & Other | | | 2,256 | | | | 2,353 | | | | (97 | ) | | | | | | | | | | | | | | | | Total Current Assets | | $ | 128,067 | | | $ | 118,234 | | | $ | 9,833 | | | | | | | | | | | | | | | | | Trade accounts payable | | $ | 9,105 | | | $ | 10,293 | | | $ | (1,188 | ) | | Accrued salaries, wages and benefits | | | 4,834 | | | | 4,824 | | | | 10 | | | Other accrued expenses, commissions and deposits | | | 2,666 | | | | 3,950 | | | | (1,284 | ) | | | | | | | | | | | | | | | | Total current liabilities | | $ | 16,605 | | | $ | 19,067 | | | $ | (2,462 | ) | | | | | | | | | | | | | | | | Net working capital | | $ | 111,462 | | | $ | 99,167 | | | $ | 12,295 | | | | | | | | | | | | | | | | | Working capital ratio | | 7.7 to 1 | | | 6.2 to 1 | | | | | |
As of January 31, 2016, total assets increased compared to February 1, 2015, primarily due to increased cash and cash equivalents due to increased operating cash flows during fiscal 2016, decreased accounts receivable due to lower sales in fourth quarter of fiscal 2016 compared to fiscal 2015 and decreased inventories as a result of more effectively matching inventory levels with projected demand.
Summary Cash Flow Information – Operating, Investing and Financing Activities | | | Fifty-Two Weeks Ended | | | Fifty-Two Weeks Ended | | | Fifty-Two Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Net cash provided by operating activities | | $ | 23,036 | | | $ | 22,768 | | | $ | 5,696 | | | Net cash used in investing activities | | | (3,455 | ) | | | (3,681 | ) | | | (3,855 | ) | | Net cash used in financing activities | | | (4,322 | ) | | | (4,306 | ) | | | (4,301 | ) | | Net increase (decrease) in cash and cash equivalents | | $ | 15,259 | | | $ | 14,781 | | | $ | (2,460 | ) |
| | | Fifty-Three Weeks Ended | | | Fifty-Two Weeks Ended | | | Fifty-Two Weeks Ended | | | | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | Net cash provided by operating activities | | $ | 9,662 | | | $ | 27,746 | | | $ | 31,240 | | Net cash used in investing activities | | | (4,511 | ) | | | (36,483 | ) | | | (88,061 | ) | Net cash (used in) provided by financing activities | | | (24,631 | ) | | | (140 | ) | | | 42,691 | | Net decrease in cash and cash equivalents | | $ | (19,480 | ) | | $ | (8,877 | ) | | $ | (14,130 | ) |
During fiscal 2016, $23.02019, $9.7 million of cash generated from operations, $1.2 million life insurance proceeds and cash on hand fundedhelped make $17.9 million in principal payments on our term loans, $6.7 million in cash dividends, of $4.3$5.2 million purchases of propertycapital expenditures, and equipment of $2.8 million and$652,000 insurance premiums on Company-owned life insurance premium payments of $707,000.policies. Company-owned life insurance policies are in place to compensate us for the loss of key employees, to facilitate business continuity and to serve as a funding mechanism for certain executive benefits.
During fiscal 2015, $22.82018, $27.7 million of cash generated from operations, and cash on hand, fundedand $12.0 million term-loan proceeds helped partially fund the Shenandoah acquisition, make $6.3 million long-term debt payments, $5.8 million in cash dividends, of $4.3fund $3.2 million purchases of propertycapital expenditures to enhance our business systems and equipment of $3.0 millionfacilities and pay $673,000 insurance premiums on Company-owned life insurance premium payments of $789,000.
policies.During fiscal 2014, $5.7 million of2017, cash generated from operations, cash on hand, term-loan proceeds and insurance proceeds receivedhelped fund the HMI acquisition, pay $12.3 million in long-term debt payments, pay $4.9 million in cash dividends and fund $2.5 million of capital expenditures to enhance our business systems and facilities and to pay $715,000 in premiums on Company-owned life insurance policiespolicies. 31
Liquidity, Financial Resources and Capital Expenditures
Our financial resources include: | §■ | available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance; |
| §■ | expected cash flow from operations; and |
| §■ | available lines of credit. |
We believe these resources are sufficient to meet our business requirements through fiscal 20172020 and for the foreseeable future, including: | §■ | working capital, including capital required for insourcing our Bradington-Young trade receivables in fiscal 2017 and for our new business initiatives;capital; |
| §■ | the payment of regular quarterly cash dividends on our common stock; and |
| §■ | the servicing of debt related to our acquisition of HMI.acquisition-related debt. |
As of January 31, 2016, we had an aggregate $13.3 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.7 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of January 31, 2016. There were no additional borrowings outstanding under the revolving credit facility on January 31, 2016.
Loan AgreementAgreements and Revolving Credit Facility
We currently have one unsecured term loan and one secured term loan outstanding and a revolving credit facility. The term loans are related to the Home Meridian acquisition. A second unsecured term loan, used to partially fund the Shenandoah acquisition, was paid off during fiscal 2019. Details of our loan agreements and revolving credit facility are outlined below. Original Loan Agreement On February 1, 2016, we entered into an amended and restated loan agreement (the “Loan“Original Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completionclosing of the Home Meridian acquisition. The Loan Agreement increases the amount available under our existing unsecured revolving credit facility to $30 million and increases the sublimit of such facility available for the issuance of letters of credit to $4 million. Amounts outstanding under the revolving facility will 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 basedAcquisition. Also on the average daily amount of the facility utilized during the applicable quarter. The Loan Agreement also provides us with a $41 million unsecured term loan (the “Unsecured Term Loan”) and a $19 million term loan (the “Secured Term Loan”) secured by a security interest in certain Company-owned life insurance policies granted to BofA by us under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Loan Agreement. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. Any amount borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 0.50%. We must repay any principal amount borrowed under 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 Unsecured Term Loan will become due and payable. We must pay the interest accrued on any principal amount borrowed under 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. We may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty. 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 this acquisition.the Home Meridian Acquisition.Details of the individual credit facilities provided for in the Original Loan Agreement were as follows: | ■ | Unsecured revolving credit facility. The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; |
| ■ | Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and |
| ■ | Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amounts borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement. |
32
This
New Loan Agreement On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement: | ■ | amended and restated the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility (the “Existing Revolver”), Unsecured Term Loan, and Secured Term Loan all remain outstanding under the New Loan Agreement; and |
| ■ | provided us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). Amounts outstanding under the New Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must repay the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 or the expiration of the Existing Revolver, at which time all amounts outstanding under the New Unsecured Term Loan will become due and payable. We may prepay the outstanding principal amount under the New Unsecured Term Loan, in full or in part, on any interest payment date without penalty. On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan to partially fund the cash consideration used in the Shenandoah acquisition. |
The New Loan Agreement also included customary representations and warranties and requiredrequires us to comply with customary covenants, including, among other things, the following financial covenants: § | Maintain a tangible net worth of at least $105.0 million plus 40% of net income before taxes; |
§● | Maintain a ratio of funded debt to EBITDA not exceeding: |
| □o | 2.50:1.0 through August 31, 2017;2018; |
| □o | 2.25:1.0 through August 31, 2018;2019; and |
| □o | 2.00:1.0 September 1, 2018 and1.00 thereafter. |
§ | Maintain a● | A basic fixed charge coverage chargeratio of 1.25 to 1.0;at least 1.25:1.00; and |
§ | ● | Limit capital expenditures to no more than $15.0 million during any fiscal year; andyear beginning in fiscal 2020. |
§ | Limitations on the types of investments we are allowed to make. |
The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and to create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement.
We were in compliance with theeach of these financial covenants of our previous loan agreement at January 31, 2016. Further, weFebruary 3, 2019 and expect to beremain in compliance with existing covenants for the covenantsforeseeable future. Due to our strong cash position, we paid off remaining amounts due under the new Amended and RestatedNew Unsecured Term Loan Agreement forin fiscal 2017 and into the foreseeable future. The Amended and Restated Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase shares2019. As of our common stock, subject to complying with the financial covenantsFebruary 3, 2019, $18.4 million was outstanding under the agreement.
Factoring Arrangement
We currently factor substantially allUnsecured Term Loan, and $17.1 million was outstanding under the Secured Term Loan.Revolving Credit Facility Availability
As of Bradington-Young’s accounts receivable, in most cases without recourseFebruary 3, 2019, we had an aggregate $27.7 million available under the Existing Revolver to us. Historically, we have factored these receivables because factoring: § | allowed us to outsource the administrative burdenfund working capital needs. Standby letters of the credit and collections functions for our domestic upholstery operations; |
§ | allowed us to transfer the collection risk associated with the majority of our domestic upholstery receivables to the factor; and |
§ | provided us with an additional, potential source of short-term liquidity. |
In order to realize operational efficiencies, cost savings, leverage best practices and present a single face to our customers, we plan to end our factoring relationship as our ERP system becomes fully operational at Bradington-Young in the first halfaggregate amount of fiscal 2017. However, given our current$2.3 million, used to collateralize certain insurance arrangements and projected liquidity, we do not expectfor imported product purchases, were outstanding under the transition to have a material adverse effect on our future liquidity.
revolving credit facility as of February 3, 2019. There were no additional borrowings outstanding under the Existing Revolver as of February 3, 2019.
Capital Expenditures
We expect to spend between $3.5$4 million to $5.0$6 million in capital expenditures in the 2017 fiscal year2020 to maintain and enhance our operating systems and facilities. Of these estimated amounts, we expect to spend approximately $400,000 on the implementation of our legacy Hooker Enterprise Resource Planning (ERP) system in our upholstery segment during fiscal 2017. Enterprise Resource Planning
Our new ERP system became operational for our casegoods and imported upholstery operations early in the third quarter of fiscal 2013, at H Contract and Homeware when their operations began in fiscal 2014 and at Sam Moore in the second fiscal quarter of 2016. Implementation is scheduled to be completed at Bradington-Young (BY) during the first half of fiscal 2017. Once BY is fully operational on the ERP platform, we expect to realize operational efficiencies and cost savings as well as present a single face to our customers and leverage best practices across the traditional Hooker organization. HMI operates on a separate ERP platform.
Cost savings are difficult to quantify until the ERP system becomes fully operational across our Hooker business units. We expect to be able to reduce administrative functions, which are presently duplicated across our segments and improve our purchasing power and economies of scale. In addition to the capital expenditures discussed above, our ERP implementation will require a significant amount of time invested by our associates.
We refer you to Item “1A. Risk Factors”, above, for additional discussion of risks involved in our ERP system conversion and implementation.
Share Repurchase Authorization
During the fiscal 2013, first quarter, our Board of Directors authorized the repurchase of up to $12.5 million of the Company’s common shares. 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 discretion of our Board of Directors. Repurchases may be made from time to time in the open market, or through privately negotiated transactions or otherwise, in compliance with applicable laws, rules and regulations, and subject to our cash requirements for other purposes, compliance with the covenants under the loan agreement for our revolving credit facility and other factors we deem relevant. No shares were purchased under the authorization during fiscal 2016, fiscal 2015 or fiscal 2014.2019. Approximately $11.8 million remainedremains available for future purchases under the authorization as of January 31, 2016.
February 3, 2019.Dividends
We declared and paid dividends of $0.57 per share or approximately $6.7 million in fiscal 2019. On March 1, 20163, 2019 our Board of Directors declared a quarterly cash dividend of $0.10$0.15 per share, payable on March 31, 201629, 2019 to shareholders of record at March 15, 2016. We declared and paid dividends of $0.40 per share or approximately $4.3 million in fiscal 2016.
18, 2019.Commitments and Contractual Obligations
As of January 31, 2016,February 3, 2019, our commitments and contractual obligations were as follows: | | | Cash Payments Due by Period (In thousands) | | | | | | | | Less than | | | | | | | | | More than | | | | | | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 years | | | Total | | Deferred compensation payments (1) | | $ | 354 | | | $ | 1,060 | | | $ | 1,590 | | | $ | 11,226 | | | $ | 14,230 | | Operating leases (2) | | | 1,857 | | | | 2,781 | | | | 2,701 | | | | 212 | | | | 7,551 | | Other long-term obligations (3) | | | 1,175 | | | | 331 | | | | 63 | | | | - | | | | 1,569 | | | Total contractual cash obligations | | $ | 3,386 | | | $ | 4,172 | | | $ | 4,354 | | | $ | 11,438 | | | $ | 23,350 | |
__________________
| | | Cash Payments Due by Period (In thousands) | | | | | Less than | | | | | | | | | | | More than | | | | | | | | | 1 Year | | | 1-3 Years | | | 3-5 Years | | | 5 years | | | Total | | Long Term Debt (1) | | $ | 5,857 | | | $ | 29,651 | | | $ | - | | | $ | - | | | $ | 35,508 | | Deferred compensation payments (2) | | | 684 | | | | 2,080 | | | | 2,148 | | | | 5,023 | | | | 9,935 | | Operating leases (3) | | | 7,778 | | | | 12,546 | | | | 6,022 | | | | 588 | | | | 26,934 | | Total contractual cash obligations | | $ | 14,319 | | | $ | 44,277 | | | $ | 8,170 | | | $ | 5,611 | | | $ | 72,377 | |
(1) | (1) | These amounts represent obligations due under the Unsecured Term Loan and the Secured Term Loan. See Note 12 to the consolidated financial statements beginning on page F-25 for additional information about our long-term debt obligations. | | (2) | These amounts represent estimated cash payments to be paid to participants in our supplemental retirement income plan or “SRIP”SRIP through fiscal year 2043, which is 15 years after the last current SRIP plan participant is assumed to have retired. SERP benefits are paid over the lifetimes of plan participants, so the year of final payment is unknown. The present value of these benefits (the actuarially derived projected benefit obligation for this plan) wasthe SRIP and SERP) were approximately $8.2$9.6 million and $1.8 million, respectively, at January 31, 2016February 3, 2019, and isare shown on our consolidated balance sheets, with $354,000$684,000 recorded in current liabilities and $7.8$10.7 million recorded in long-term liabilities. TheUnder the SRIP, the monthly retirement benefit for each participant, regardless of age, would become fully vested and the present value of that benefit would be paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. See note 10Note 13 to the consolidated financial statements beginning on page F-18F-27 for additional information about the SRIP.SRIP and SERP. |
(2) | (3) | These amounts represent estimated cash payments due under operating leases for real estate utilized in our operations and warehouse and office equipment. $6.7 million of these estimated cash payments pertain to two leases: (1) Our CDC II warehouse and distribution facility and (2) our showroom at the International Home Furnishings Center. See Item 2 “Properties,” for a description of our leased real estate. |
(3) | These amounts represent estimated cash payments due under various long-term service and support agreements, for items such as warehouse management services, information technology support and human resources related consulting and support. |
Off-Balance Sheet Arrangements Standby letters of credit in the aggregate amount of $1.7$2.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under our revolving credit facility as of January 31, 2016.February 3, 2019. See the “Commitments and Contractual Obligations” table above and Note 1618 to the consolidated financial statements included in this annual report on Form 10-K for additional information on our off-balance sheet arrangements. Substantially all of the cash value of our company owned life insurance is pledged as collateral for our secured term loan. 34
Recently Issued Accounting Pronouncements
In May 2014,August 2018, the Financial Accounting Standards Board (the “FASB”)FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”No. 2018-14, Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in ASU 2014-09 affects any entitythis update change the disclosure requirements for employers that either enters into contracts with customers to transfer goods sponsor defined benefit pension and/or services or enters into contractsother post-retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the transfer of nonfinancial assets unless those contracts are within the scope of other standards. This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606, Revenue from Contracts with Customers.FASB considers pertinent. The core principle of the 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 to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which defers the effective date of ASU 2014-09 for all entities by one year. ASU 2014-09 is now effective for financial statements issued for annual reporting periods beginningfiscal years ending after December 15, 2017. We are currently evaluating the impact of the pending adoption of ASU 2014-09 on our consolidated financial statements. In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonable predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. The amendment is effective for public entities for fiscal years beginning after December 15, 2016 and should be applied prospectively, however early2020. Early adoption is permitted. We do not anticipateexpect the adoption of ASU 2015-112018-14 will have a material impact on our consolidated financial statements.
statements or disclosures.In July 2015,June 2016, the FASB issued ASU 2015-16, Business Combinations2016-13, Financial Instruments—Credit Losses (Topic 805): Simplifying326). This update seeks to provide financial statement users with more decision-useful information about the Accounting for Measurement Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustmentsexpected credit losses on financial instruments, including trade receivables, and other commitments to provisional amounts that are identified during the measurement period in theextend credit held by a reporting period in which the adjustment amounts are determined.entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in this Update requirecurrent GAAP with a methodology that the acquirer record, in the same period’s financial statements, the effect on earningsreflects current expected credit losses and requires consideration of changes in depreciation, amortization, or other income effects, if any, as a resultbroader range of the changereasonable and supportable information to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Any current period adjustments to provisional amounts that would have impacted a prior period’s earnings had they been recognized at the acquisition date are required to be presented separately on the face of the income statement or disclosed in the notes.inform credit loss estimates. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, including2019. Early adoption is permitted for fiscal years, and interim periods within those fiscal years.years, beginning after December 15, 2018. The amendments in this ASU shouldwill be applied prospectivelythrough a cumulative-effect adjustment to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. Therefore the amendments in ASU 2015-16 will become effective for usretained earnings as of the beginning of our 2017 fiscal year.the first reporting period in which guidance is effective, which is a modified-retrospective approach. We are currently evaluating the impacteffects of the pending adoption of ASU 2015-16adopting this standard will have on our consolidated financial statements.
statements and results of operations.In November 2015,February 2016, the FASB issued Accounting Standards UpdateASU 2016-02, Leases, which, among other things, requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. This update amendsThe new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet classification of deferred taxes and requires that deferred tax liabilities and assetsfor all leases with a term longer than 12 months. Leases will be classified as noncurrentfinance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The lease liability recognized will be equal to the present value of lease payments and the right-of-use asset will be based on the balance sheet. Previous guidancelease liability, subject to adjustment such as for initial direct costs. A modified retrospective transition approach is required, deferred tax liabilities and assetsapplying the new standard to be separated into current and noncurrent amounts onall leases existing at the balance sheet. The guidance isdate of initial application. An entity may choose to use either (1) its effective for fiscal years beginning ondate or after December 15, 2016, and interim periods within those years. Early adoption is permitted as of(2) the beginning of any interimthe earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on February 4, 2019 and will use the effective date as our date of initial application. The new standard provides a number of optional practical expedients in transition. We have elected the package of practical expedients, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We do not expect to elect the use-of hindsight or annual reporting period. This guidance may be applied either prospectively,the practical expedient pertaining to land easements; the latter not being applicable to us. To date, we identified all of our leases, the majority of which are for real estate used in our operations, completed our search for embedded leases in our contracts and agreements and completed the calculations of the right-of-use asset and lease liability. While our calculations are subject to revision, we currently expect to record a right-of-use asset and a lease liability of approximately $45 million upon adoption. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all deferred taxleases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities or retrospectively by reclassifyingfor existing short-term leases of those assets in transition. We also currently expect to elect the comparative balance sheet. practical expedient to not separate lease and non-lease components for all of our leases. Outlook We have early adopted this standard and have applied retrospective treatmentbeen able to mitigate much of the standard. We feelimpact of the classification of all deferred tax assets and liabilities as noncurrent provides a more informative disclosure because many10% tariff, thanks to the cooperation of our deferred tax items are by definition short-term, however are of a recurring naturesupply partners and tend to behave more like non-current assets or liabilities. The retrospective reclassification resulted in a reduction in current assets of $1.7 million and an increase in non-current assetsour customers. With the possibility of the tariff increasing to 25% at a future date, we will continue to work to mitigate the impact of the tariffs by re-sourcing manufacturing in non-tariff countries, without compromising the quality and service our customers expect. Our management team remains focused on building a responsive, focused organization, which drives success and high performance, but is instilled with the culture and values that have contributed to our success for nearly ninety-five years. Adaptation, the ability to react to challenges in the short-term and change strategies, or develop new strategies over the longer-term, are an important part of that culture. We believe we have an organization ready to face a changing global market and to leverage change into new opportunities for growth. Many long-term macro-economic indicators are positive and developments in the housing market, including more affordable mortgage rates, a near-record level of home remodeling activity and the highest rate of homeownership in five years are especially encouraging. However, we have seen a softening of demand and retail activity in the first two months of fiscal 2020. For the fiscal 2019 fourth quarter, incoming orders were essentially flat, but in fiscal February and March, incoming orders were down in the low double digits on a consolidated basis, with backlogs similarly deflated versus the same amountperiod in the prior year. Based on industry dynamics and the macro-economic outlook for the period ended February 1, 2015. Strategy
Our strategy is to offer world-class style, quality and product value as a complete residential casegoods and upholstered furniture resource through excellence in product design, global sourcing, manufacturing, logistics, sales, marketing and customer service. We strive to be an industry leader in sales growth and profitability performance, thereby providing an outstanding investment for our shareholders and contributing to the well-being of our customers, employees, suppliers and communities. Additionally, we strive to nurture the relationships, teamwork and integrity that characterizes our corporate culture and that has distinguished our company for over 90 years.
Fiscal 2016 in Review
Profitability improvement was the high point of fiscal 2016. All operating segments reported improved profitability over the prior year, even on essentially flat sales in the casegoods segment and decreased sales in the upholstery segment. We believe sales were impacted by an uneven national and global economy which culminated in stock market declines in the fourth quarter of calendar 2015, despite generally positive economic news. We believe this market behavior has a short-term influence on big-ticket purchases such as home furnishings, but we continue to believe that housing and the US economy in general will continue to trend positively, but not without occasional downward pressures.
Our Casegoods segment, a major contributor to corporate profitability, reported a 7% increase in operating profit despite disappointing sales growth and approximately $1.1 million of professional fees related to the Home Meridian acquisition. Casegoods reported another year of operating income margin in excess of 10%, thanks to continued low discounting, relatively low inflation, lower quality related costs, and a focus on account and sales program profitability, as well as ongoing cost containment efforts.
We are especially pleased with the fiscal 2016 performance of our upholstery segment, which doubled operating income compared to the prior year. Bradington-Young (B-Y) built on good performance in the prior year, growing operating profit by 70% thanks to a 5% sales increase and manufacturing cost improvements as B-Y’s factories continue to run smoothly and efficiently. Sam Moore also reported $1.5 million in operating income, in its first profitable year, even while implementing an Enterprise Resource Planning system at their location during the year. After resolving the typical bumps and slowdowns after going live mid-year, Sam Moore is now reaping the benefits of the substantial time and financial investment we’ve made in these systems. Information is now more readily available for customers and for internal planning, scheduling and purchasing and we are moving closer to our goal of ‘One Face to the Customer’. While Sam Moore’s sales volume declined from the prior year, some of the lost sales were in unprofitable or low profitability sales programs. Focusing on more profitable sales and significantly improved manufacturing efficiency contributed to the income turnaround. Hooker Upholstery also experienced a 4% sales decline due to changes with some of our largest customers and lower demand for some of Hooker Upholstery’s more upscale imported leather seating. Despite this volume decline, Hooker Upholstery was able to increase operating income by nearly 30%, thanks to cost and inventory management and the addition of new product categories such as bar and counter stools to meet changing customer preferences.
Our All Other segment also showed improvement in fiscal 2016. H Contract, which sells casegoods and upholstery to the senior living market, increased net sales by nearly 70% over the prior year and reported 6.2% operating income in its second full year of operations. While still a relatively small part of our volume, we are pleased with the progress H Contract has made and believe it will continue to grow at well above industry average for several more years. During the past year, H Contract focused on improving business processes and customer service, added marketing and operations personnel, increased sales representation coverage and invested in new products and additional marketing to grow the business. Thanks to its ability to leverage Hooker casegoods and the unique look of many Sam Moore designed products, supplemented by wood and upholstered products sourced from other vendors, H Contract has developed significant relationships with some of the largest developers in the senior living industry.
Homeware, our other internal growth initiative, grew sales by about 28% and reduced operating losses by more than 40% while repositioning and redefining its strategy. After determining that the costs of merchandising and driving traffic to a consumer web site proved to be more than we were willing to spend, we evaluated the data gathered during Homeware’s first year in operation and revised our strategy. We believe that the original Homeware concept; high fashion, high quality products, which were easy to assemble and could be shipped via parcel delivery services; still resonates with consumers. Our challenges were to improve the product value proposition and increase sales volume of products reflecting Homeware’s core values. To accomplish these objectives, we pared the product line, discontinued consumer direct marketing and online sales and began sourcing products from lower cost suppliers. We are focused on promoting these updated products through major online home furnishings retailers and believe Homeware will see greater success under this new business model.
Home Meridian Acquisition
On January 5, 2016, we entered into an asset purchase agreement (“the “Agreement”) with Home Meridian International, Inc. (“HMI”) to acquire substantially all of HMI’s assets in exchange for $85 million in cash and $15.0 million in unregistered shares of our common stock, with both amounts subject to adjustment for certain working capital estimates detailed in the Agreement. We completed the acquisition on February 1, 2016, subsequent to the end of our 2016 fiscal year. The working capital adjustment, paid for with 186,312 shares of our common stock, totaled $5.3 million and was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of 2015. We also assumed certain liabilities of HMI, including approximately $7.8 million of liabilities related to certain retirement plans. The assumed liabilities did not include HMI’s indebtedness (as defined in the Agreement).
We have had a long and successful history in the furniture industry for over ninety years; marketing, sourcing and manufacturing wood and upholstery furniture, primarily in the mid-to-upper price points, and much of it through traditional furniture retailers. We have adapted to changes within those channels and price points and have become a major supplier in our channels. However, a great deal of furniture is sold in channels and at price points in which we have traditionally not been a factor. For several years, we sought to find appropriate investments to expand our reach with furniture consumers and find ways to do business in new channels, new products or new customers. We have long desired to invest to position Hooker Furniture for the future furniture market and looked for acquisition or investment opportunities which would help us meet those objectives.
When we were offered the opportunity to negotiate to purchase Home Meridian International, we saw those opportunities. HMI was a privately held furniture supplier, whose sales had grown at about three times the industry growth rate, was profitable on an operating income basis and appeared to be establishing itself as a key supplier within its distribution channels.
Like Hooker, casegoods are a substantial portion of the HMI business’s revenues; however, there are few similarities beyond that. In HMI we see a business which addresses the needs of mass market furniture suppliers including ‘big box’ furniture stores, department stores, and warehouse clubs and rental stores. Many of HMI’s customers are ‘mega-accounts’ capable of purchasing large quantities and maintaining their own national or regional distribution networks. These mega-accounts are focused on product price, value and sourcing, which HMI is able to maximize by delivering over 70% of its sales container direct from factories in Asia. A lean, data and technology driven business, HMI is able to offer a strong value proposition for the mid-price products which comprise the bulk of their offerings. HMI sales teams collaborate with merchandise managers at these mega-accounts to design and develop new products. Overall, we believe that HMI understands how to do business in this channel and to be a key supplier to these accounts.
Beyond the mega-account strategy, HMI offers us other avenues for growth as well, through a well- developed e-commerce division. This division, which develops products and programs for major e-retailers sells more moderately priced products through traditional furniture stores and through its growing hospitality division, which supplies hotels and other institutional customers. In addition to products and distribution channels, the acquisition brings together two strong performers in the furniture industry which we believe will create the second largest casegoods source and the fifth largest public furniture supplier in the US. Opportunities to leverage costs and best practices across the organization will help create value beyond the earnings accretion, which will occur by combining these two profitable entities and the combined management and employee group offers greater growth and succession planning opportunities for employees in both organizations.
We believe this move will help diversify our customer and product portfolio, help create growth and implement best practices in both organizations and will help position us for market leadership well into the future.
We expect to record significant tangible and intangible assets on our consolidated balance sheets during our fiscal 2017 first fiscal quarter. For certain tangible and intangible assets, reevaluating fair value as of the completion date of the acquisition will result in additional depreciation and/or amortization expense that exceed the combined amounts recorded by Hooker and HMI prior to the acquisition. This increased expense will be recorded by us over the useful lives of the underlying assets. We expect to record approximately $3.4 million in amortization expense on those intangible assets during fiscal 2017 and expect amortization expense of approximately $1.4 million per year starting in fiscal 2018 through fiscal 2027.
This acquisition is not without substantial risks. We refer you to Item 1A. Risk Factors and note 18 to our consolidated financial statements in this report for additional information.
Potential Duties on Accent Chests
On May 27, 2014, the U.S. Department of Commerce (“DoC”) determined that certain accent chests manufactured in China for one of our competitors constitute “wooden bedroom furniture” that is subject to anti-dumping duties under the Continued Dumping Subsidy Offset Act of 2000. In early June 2014, the DoC directed U.S. Customs and Border Protection (“CBP”) to begin collecting the anti-dumping duty on these items. While the DoC ruling applies only to the specific accent chests mentioned in the ruling, it is uncertain whether CBP also will begin to collect anti-dumping duties with respect to other similar accent chests imported from China. We currently import, and have imported in the past, accent chests from China that may be similar to those that are subject to the DoC ruling, including accent chests sourced from the same Chinese company that manufactures the accent chests addressed by the DoC ruling.
We are currently not able to determine whether any of the accent chests we source from China, now or in the past, would be subject to the anti-dumping duties. Nor are we able to estimate the potential amount of any such duties. We do not believe the duties, if any, would be assessed retroactively; however, CBP audits can go back five years and any assessment could be subject to interest and penalties. If the bedroom furniture anti-dumping duties, or related penalties, were to be assessed on accent chests that we import, or have imported in the past, from China, our results of operations, financial condition, liquidity and prospects could be adversely affected.
During the fiscal 2015 third quarter, the DoC agreed to reconsider some of its earlier findings related to accent chests and early in the fiscal 2015 fourth quarter, DoC reaffirmed its decision that certain of our competitor’s accent chests constituted wooden bedroom furniture subject to anti-dumping duties. The competitor challenged DoC’s position in the United States Court of International Trade (“CIT”). On December 1, 2015, the court issued a decision remanding the accent chest issue to DoC with the instruction to reconsider the treatment of accent chests in a manner consistent with the court’s decision, which on balance is favorable to our views. DoC issued a remand decision holding that the accent chests were not bedroom furniture. On February 29, 2016, the CIT sustained that determination. DoC has 60 days to appeal that decision.
Customs Penalty
In September 2009, CBP issued an audit report asserting that we had not paid all required antidumping duties due with respect to certain bedroom furniture we imported from China. In February 2015, CBP assessed a civil penalty of approximately $2.1 million and unpaid duties of approximately $500,000 on the matter. In December 2015, in response to our petition to eliminate or modify the assessment, CBP revised the proposed penalty to approximately $1.7 million, while leaving the duty assessment at approximately $500,000. We continue to assert that no antidumping duties are due and that there is no basis for the imposition of a penalty. We intend to vigorously defend against the penalty. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.
Our business is subject to a number of significant risks and uncertainties, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see “Forward Looking Statements” beginning on page 3 of this report and Item 1A, “Risk Factors” beginning on page 12 of this report.
Outlook
Looking forward, we see a generally healthy US economy, but one with more volatility than that to which many investors are accustomed. We also see a furniture industry in which consumer tastes and the channels in which they shop are evolving at a rapid rate. To address these changes, we also continue to change. Sometimes evolving and growing and sometimes with big changes, such as the acquisition of Home Meridian International, which gives us access to many new customers, distribution channels and price points and helps position us, we believe, for market leadership well into the future.
So far in fiscal 2017, we have seen lower demand for our products compared to the same period a year ago. However, given the mostly positive economic news over the past year, we are optimistic about our longer-term future, with our core businesses, our new ventures and in our new Home Meridian division.
As we progress through 2017, we will focus on:
| § | evaluating ways to expand into new distribution channels; |
| § | successfully integrating the Home Meridian division; |
| § | leveraging best practices in order to lower costs, improve efficiencies and grow sales; |
| § | growing and improving the profitability of our new business initiatives; |
| § | building on our initial successes in expanding our merchandising reach in the “better” parts of our “good-better-best” casegoods product offerings; |
| § | growing sales of our Cynthia Rowley home furnishings collection; |
| § | improving the product assortment and value proposition of the Hooker Upholstery imported products line; |
| § | improving operating profitability and increasing production capacity at Sam Moore; |
| § | mitigating inflation on our imported products and raw materials; |
| § | maintaining proper inventory levels and optimizing product availability on best-selling items; |
| § | strengthening our relationships with key vendors and sourcing product from cost-competitive locations and from quality-conscious sourcing partners; |
| § | offering an array of new products and designs, which we believe will help generate additional sales; |
| § | upgrading and refining our information systems capabilities to support our businesses, including implementing an ERP system at Bradington-Young; and |
We face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors” beginning on page 12 and in our “Forward Looking Statements” beginning on page 3, which can affect adversely our results of operations and financial condition.
Critical Accounting Policies and Estimates
Hooker Furniture’sOur significant accounting policies are described in “Note 12 – Summary of Significant Accounting Policies” to the consolidated financial statements beginning at page F-1F-11 in this report. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements and related notes. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe that actual results will deviate materially from our estimates related to our accounting policies described below. However, because application of these accounting policies involves the exercise of judgment and the use of assumptions as to future uncertainties, actual results could differ materially from these estimates.
Allowance for Doubtful Accounts. We evaluatePurchase Price Allocation. For the adequacyShenandoah acquisition, we allocated the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Determining the fair value of our allowance for doubtful accounts atcertain assets and liabilities acquired is subjective in nature and often involves the enduse of each quarter. In performing this evaluation, we analyze the payment history of our significant past due accounts, subsequent cash collections on these accountsestimates and comparative accounts receivable aging statistics. Based on this information, along with considerationassumptions, which are inherently uncertain. Many of the general condition of the economy, we develop what we considerestimates and assumptions used to be a reasonable estimate of the uncollectible amounts included in accounts receivable. This estimate involves significant judgment and actual uncollectible amounts may differ materially from our estimate.
Valuation of Inventories. We value all of our inventories at the lower of cost or market (using the last-in, first-out (“LIFO”) method). LIFO costdetermine fair values, such as those used for all of our inventories is determined using the dollar-value, link-chain method. This method allows for the more current cost of inventories to be reported in cost of sales, while the inventories reported on the balance sheet consist of the costs of inventories acquired earlier, subject to adjustment to the lower of cost or market. Hence, if pricesintangible assets, are rising, the LIFO method will generally lead to higher cost of sales and lower profitability as compared to the first-in, first-out (“FIFO”) method. We evaluate our inventory for excess or slow moving items based on recent and projected sales and order patterns. We establish an allowance for those items when the estimated market or net sales value is lower than their recorded cost. This estimate involves significant judgment and actual values may differ materially from our estimate.
Income Taxes. At times, tax law and generally accepted accounting principles differ in the treatment of certain income and expense items. These items may be excluded or included in taxable income at different times than is required for GAAP or “book” reporting purposes. These differences may be permanent or temporary in nature.
For quarterly reporting purposes, we determine our annual effective income tax ratemade based on forecasted pre-tax book incomeinformation and forecasted permanent bookdiscount rates. To assist in the purchase price allocation process, as well as the estimate of remaining useful lives of acquired assets, we engaged a third-party appraisal firm. In addition, the judgments made in determining the estimated fair value assigned to each class of assets acquired and tax differences. The rateliabilities assumed, as well as asset lives, can materially impact our results of operations.Revenue Recognition. We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is establishedto record revenue when control of the goods transfers to the customer. We have a present right to payment at the beginningtime 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 year andproducts, the customers’ right to re-direct shipment indicates control. In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container. The transaction price for each contract is evaluated onthe 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 quarterly basis. We considerfuture material right which could result in a separate performance obligation for the level and mixpurchase of income of our separate legal entities, statutory tax rates, business credits availablegoods in the various jurisdictionsfuture 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 operateexpect to be entitled. This amount of variable consideration included in the transaction price, and permanent tax differences. Significant judgmentmeasurement of net sales, is requiredincluded in evaluating tax positions that affect the annual tax rate. Any changesnet sales only to the forecasted information may cause adjustments to the effective rate. Additional tax, interest and penalties associated with uncertain tax positions are recognized in tax expense on a quarterly basis. To the extent that any book and tax differences are temporary in nature,it is probable that is, the book realizationthere will occurbe no significant reversal in a different period thanfuture period.Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts. Physical product returns are very rare due to the tax realization,high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a deferred tax assetdown payment or liability is established. Todeposit. Due to the extent that a deferred tax asset is created, we evaluate our ability to realize this asset. If we determine that we will not be able to fully utilize deferred tax assets, we establish a valuation reserve. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences reverse.
We early adopted Accounting Standards Update No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes in the fourth quarter of fiscal 2016 and have applied retrospective treatment of the standard. Consequently, all deferred tax assets and liabilities are classified as non-current on our consolidated balance sheets We feel the classification of all deferred tax assets and liabilities as noncurrent provides a more informative disclosure because manyhighly-customized nature of our deferred tax items are by definition short-term, however arehospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of a recurring nature and tend to behave more like non-current assets or liabilities. The retrospective reclassification results in a reduction in current assets of $1.7 million and an increase in non-current assets of the same amount for the period ended February 1, 2015.
delivery.Impairment of Long-Lived Assets
Tangible and Definite Lived Intangible Assets
We regularly review our property, plant and equipment and definite lived intangible assets for indicators of impairment, as specified in the Property, Plant and Equipment topic of the Accounting Standards Codification. Although not exhaustive, this accounting guidance lists potential indicators of impairment, which we use to facilitate our review. These potential indicators of impairment include: | §■ | A significant decrease in the market value of the long-lived asset; |
| §■ | A significant adverse change in the extent or manner in which a long-lived asset group is being used, or in its physical condition; |
| §■ | A significant adverse change in the legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; |
| §■ | An accumulation of costs significantly in excess of the amount originally expected to acquire or construct a long-lived asset; |
| §■ | A current period operating or cash flow loss or a projection or forecast that demonstrates continuing losses associated with the long-lived asset’s use; and |
| §■ | A current expectation that more-likely-than-not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. |
When an indicator of impairment is present, the impairment test for our property, plant and equipment requires us to assess the recoverability of the value of the assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from use and eventual disposition of the assets. We principally use our internal forecasts to estimate the undiscounted future cash flows used in our impairment analyses. These forecasts are subjective and are largely based on management’s judgment, primarily due to the changing industry in which we compete;compete, changing consumer tastes, trends and demographics and the current economic environment. We monitor changes in these factors as part of the quarter-end review of these assets. While our forecasts have been reasonably accurate in the past, during periods of economic instability, uncertainty, or rapid change within our industry, we may not be able to accurately forecast future cash flows from our long-lived assets and our future cash flows may be diminished. Therefore, our estimates and assumptions related to the viability of our long-lived assets may change, and are reasonably likely to change in future periods. These changes could adversely affect our consolidated statements of income and consolidated balance sheets. As of January 31, 2016, the fair value of our property, plant and equipment was substantially in excess of its carrying value.
When we conclude that any of these assets are impaired, the asset is written down to its fair value. Any impaired assets that we expect to dispose of by sale are measured at the lower of their carrying amount or fair value, less estimated cost to sell; are no longer depreciated; and are reported separately as “assets held for sale” in the consolidated balance sheets, if we expect to dispose of the assets in one year or less.
and GoodwillWe own certainboth definite-lived (amortizable) assets and indefinite-lived intangible assets. Our amortizable intangible assets including thoseare related to the Home Meridian and Shenandoah acquisitions and include customer relationships, backlog and trademarks. Our indefinite lived assets include goodwill, trademarks and tradenames related to the Home Meridian and Shenandoah acquisitions, as well as the Bradington-Young and Sam Moore and Homeware.tradenames. We may acquire additional amortizable assets and/or indefinite lived intangible assets in the future. Our principal indefinite-lived intangible assets are trademarks, trade names and a URL, which are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Our goodwill, trademarks and trade names are tested for impairment annually as of the first day of our fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include, but are not limited to: | ■ | a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy; | | ■ | significant changes in demand for our products; | | ■ | loss of key personnel; and | | ■ | the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal. |
The fair value of our indefinite-lived intangible assetstrademarks and tradenames is determined based on the estimated earnings and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess.
TradeAt February 3, 2019, the fair values of our Bradington-Young, Home Meridian, Sam Moore and Shenandoah trademarks and trade names exceeded their carrying values. The goodwill impairment test consists of a two-step process, if necessary. However, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test outlined in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing quantitative assessment. The quantitative assessment involves estimating the implied fair value of our goodwill using projected future cash flows that are tested fordiscounted using a weighted average cost of capital analysis that reflects current market conditions. Management judgment is a significant factor in the goodwill impairment annuallyevaluation process. The computations require management to make estimates and assumptions, the most critical of which are potential future cash flows and the appropriate discount rate. Based on our qualitative assessment as described above, we have concluded that our goodwill is not impaired as of the first day of our fiscal fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include, but are not limited to: | § | a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy; |
| § | significant changes in demand for our products; |
| § | loss of key personnel; and |
| § | the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal. |
February 3, 2019.The assumptions used to determine the fair value of our intangible assets are highly subjective and judgmental and include long-term growth rates, sales volumes, projected revenues, assumed royalty rates and factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize additional impairment on our intangible assets whichthat may have a material-adverse effect on our results of operations and financial condition.
At January 31, 2016, the fair value of our Bradington-Young trade name exceeded its carrying value by approximately $1.4 million, and the fair value of our Sam Moore trade name was approximately $637,000 in excess of its carrying value.
Concentrations of Sourcing Risk
We source imported products through approximately 18 different vendors, from approximately 20 separate factories, located in five countries. Because of the large number and diverse nature of the foreign factories from which we can source our imported products, we have some flexibility in the placement of products in any particular factory or country.
Factories located in China and Vietnam are an important resource for Hooker Furniture. In fiscal year 2016,2019, imported products sourced from ChinaVietnam and VietnamChina accounted for approximately 68% and 26%, respectively,nearly all of our import purchases and the factoryour top five suppliers in Vietnam and China from which we directly source the most product accountedaccount for approximately 58%half of our worldwide purchases of imported product.fiscal 2019 import purchases. A sudden disruption in our supply chain, from this factory, or from Vietnam or China in general, could significantly impact our ability to fill customer orders for products manufactured at that factory or in that country.those countries. If such a disruption were to occur, we believe that we would have sufficient inventory currently on hand in and in transit to our U.S. warehouses in Martinsville, VAVirginia, North Carolina and California to adequately meet demand for approximately four and one-halfseveral months or slightly longer with an additional one and one quarter monthsmonth’s worth of demand available for immediate shipment from our Asia warehouse. Also, with the broad spectrum of product we offer, we believe that,warehouses in some cases, buyers could be offered similar product available from alternative sources.Asia. We believe that we could, most likely at higher cost, source most of the products currently sourced in Vietnam or China from factories in other countries and could produce certain upholstered products domestically at our own factories. However, supply disruptions and delays on selected items could occur for up to six months.months before the impact of remedial measures would be reflected in our results. If we were to be unsuccessful in obtaining those products from other sources or at comparable cost, then a sudden disruption in theour supply chain from our largest import furniture supplier,suppliers, or from Vietnam or China in general, could have a short-term material adverse effect onadversely affect our results of operations. Given the capacity available in Chinasales, earnings, financial condition and other low-cost producing countries, we believe the risks from these potential supply disruptions are manageable.
liquidity.ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various types of market risk fromin 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. 38
Interest Rate Risk In conjunction with the Shenandoah acquisition, we entered into new financing arrangements as described in "Note 12 Long-Term Debt" included in Part II, Item 8. “Financial Statements” of this Form 10-K. Borrowings under the revolving credit facility and the Unsecured Term Loan bear interest based on LIBOR plus 1.5% and borrowings under the Secured Term Loan bear interest based on LIBOR plus 0.5%. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of February 3, 2019, other than standby letters of credit in the amount of $2.3 million. However, as of February 3, 2019, $35.5 million was outstanding under our term loans. A 1% increase in the LIBOR rate would result in an annual increase in interest expense on our terms loans of approximately $328,000. 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.
Amounts outstanding under our revolving credit facility would bear interest at variable rates. In the past, we have entered into swap agreements to hedge against the potential impact of increases in interest rates on our floating-rate debt instruments. There was no outstanding balance under our revolving credit facility as of January 31, 2016, other than standby letters of credit in the amount of $1.7 million. Therefore, a fluctuation in market interest rates of one percentage point (or 100 basis points) would not have a material impact on our results of operations or financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements listed in Item 15(a), and which begin on page F-1,F-5, of this report are incorporated herein by reference and are filed as a part of this report.
Certain Non-GAAP Financial Measures
In our Annual Report to Shareholders (of which this annual report on Form 10-K is a part), under the heading “Financial Highlights,” we reported net income and earnings per share both including and excluding the impact of restructuring and asset impairment charges.
The net income, earnings per share and operating income margin figures excluding the impact of the items specified above are “non-GAAP” financial measures. We provide this information because we believe it is useful to investors in evaluating our ongoing operations. Non-GAAP financial measures provide insight into this selected financial information and should be evaluated in the context in which they are presented. These measures are of limited usefulness in evaluating our overall financial results presented in accordance with GAAP and should be considered in conjunction with the consolidated financial statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended January 31, 2016.February 3, 2019. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of January 31, 2016,February 3, 2019, the end of the period covered by this annual report, to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. 39
Management’s Annual Report on Internal Control over Financial Reporting In accordance with Section 404 of the Sarbanes-Oxley Act and SEC rules thereunder, management has conducted an assessment of our internal control over financial reporting as of January 31, 2016,February 3, 2019, based on the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s report regarding that assessment is included on page F-2 of this report, with our consolidated financial statements, and is incorporated herein by reference.
Report of Registered Public Accounting Firm
Our independent registered public accounting firm, KPMG LLP, audited the consolidated financial statements included in this annual report on Form 10-K and has issued an audit report on the effectiveness of our internal control over financial reporting. KPMG’s report is included on page F-3 and F-4 of this report, with our consolidated financial statements, and is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting for our fourthduring the fiscal quarter ended January 31, 2016,February 3, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION
Hooker Furniture Corporation
In accordance with General Instruction G (3) of Form 10-K, most of the information called for by Items 10, 11, 12, 13 and 14 of Part III will be incorporated by reference to the Company’s definitive Proxy Statement for its Annual Meeting of Shareholders scheduled to be held June 2, 201612, 2019 (the “2016“2019 Proxy Statement”), as set forth below.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to our directors will be set forth under the caption “Proposal One-Election of Directors” in the 20162019 Proxy Statement and is incorporated herein by reference.
Information relating to our executive officers is included in Part I of this report under the caption “Executive Officers of Hooker Furniture Corporation” and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Exchange Act will be set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the 20162019 Proxy Statement and is incorporated herein by reference.
Information relating to the code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions will be set forth under the caption “Code of Business Conduct and Ethics” in the 20162019 Proxy Statement and is incorporated herein by reference.
Information relating to material changes, if any, in the procedures by which shareholders may recommend nominees for our Board of Directors will be set forth under the caption “Procedures for Shareholder Recommendations of Director Nominees” in the 20162019 Proxy Statement and is incorporated herein by reference.
Information relating to the Audit Committee of our Board of Directors, including the composition of the Audit Committee and the Board’s determinations concerning whether certain members of the Audit Committee are “financial experts” as that term is defined under Item 407(d)(5) of Regulation S-K will be set forth under the captions “Corporate Governance” and “Audit Committee” in the 20162019 Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to this item will be set forth under the captions “Report of the Compensation Committee,” “Executive Compensation” and “Director Compensation” in the 20162019 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS |
Information relating to this item will be set forth under the captions “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 20162019 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information relating to this item will be set forth in the last paragraphtwo paragraphs under the caption “Audit Committee” and the caption “Corporate Governance” in the 20162019 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information relating to this item will be set forth under the caption “Proposal Two- Ratification of Selection of Independent Registered Public Accounting Firm” in the 20162019 Proxy Statement and is incorporated herein by reference.
Hooker Furniture Corporation
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this report on Form 10-K: (a)(1) | Documents filed as part of this report on Form 10-K: | | | (1) | The following reports and financial statements are included in this report on Form 10-K: |
Management’s Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of February 3, 2019 and January 28, 2018. Consolidated Statements of Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and January 29, 2017. Consolidated Statements of Comprehensive Income for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017. Consolidated Statements of Cash Flows for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017. Consolidated Statements of Shareholders’ Equity for the fifty-three-week period ended February 3, 2019 and the fifty-two-week periods ended January 28, 2018 and, January 29, 2017. Notes to Consolidated Financial Statements (2) | | | Management’s Report on Internal Control Over Financial Reporting | | | | Reports of Independent Registered Public Accounting Firm | | | | Consolidated Balance Sheets as of January 31, 2016 and February 1, 2015. | | | | Consolidated Statements of Income for the fifty-two week periods ended January 31, 2016, February 1, 2015, and February 2, 2014. | | | | Consolidated Statements of Comprehensive Income for the fifty-two week periods ended January 31, 2016, February 1, 2015, and February 2, 2014. | | | | Consolidated Statements of Cash Flows for the fifty-two week periods ended January 31, 2016, February 1, 2015, and February 2, 2014. | | | | Consolidated Statements of Shareholders’ Equity for the fifty-two week periods ended January 31, 2016, February 1, 2015, and February 2, 2014. | | | | Notes to Consolidated Financial Statements | | | (2) | Financial Statement Schedules: | | | | Financial Statement Schedules have been omitted because the information required has been separately disclosed in the consolidated financial statements or related notes. | | | (b) | Exhibits: |
Financial Statement Schedules have been omitted because the information required has been separately disclosed in the consolidated financial statements or related notes. 2.1 | Asset Purchase Agreement by and between the Company and Home Meridian International, Inc., dated as of January 5, 2016 (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on January 7, 20162016) | | | 2.2 | Asset Purchase Agreement, dated as of September 6, 2017, by and among Hooker Furniture Corporation, Shenandoah Furniture Corporation, Gideon C. Huddle and Candace H. Payne (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017) | 3.1 | | 3.1 | Amended and Restated Articles of Incorporation of the Company, as amended March 28, 2003 (incorporated by reference to Exhibit 3.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended February 28, 2003) | | | 3.2 | Amended and Restated Bylaws of the Company as amended December 10, 2013 (incorporated by reference to Exhibit 3.2 of the Company’s Form 10-K (SEC File No. 000-25349) for the fiscal year ended February 2, 2014) | | | 4.1 | | 4.1 | Amended and Restated Articles of Incorporation of the Company (See Exhibit 3.1) | | | 4.2 | Amended and Restated Bylaws of the Company (See Exhibit 3.2) | | | | Pursuant to Regulation S-K, Item 601(b)(4)(iii), instruments, if any, evidencing long-term debt not exceeding 10% of the Company’s total assets have been omitted and will be furnished to the Securities and Exchange Commission upon request. |
10.1(b) | | 10.1(b) | Form of Outside Director Restricted Stock Agreement (incorporated by reference to Exhibit 99.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on January 17, 2006)* | | | 10.1(c) | 2015 Amendment and Restatement of the Hooker Furniture Corporation Stock Incentive Plan (incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement dated March 1, 2015 (SEC File No. 000-25349))* | | | 10.1(d) | 2010 Amended and Restated Hooker Furniture Corporation Supplemental Retirement Income Plan, dated as of June 8, 2010 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended October 31, 2010)* | | | 10.1(e) | Form of Time-Based Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)* | | | 10.1(f) | Form of Performance Grant Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 13, 2012)* | | | 10.1(g) | Employment Agreement, dated August 22, 2011, between Michael W. Delgatti, Jr. and the Company(incorporated by reference to Exhibit 10.1(l) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 13, 2012)* | | | 10.1(h) | Employment Agreement, dated January 5, 2016, between George Revington and the Company (incorporated by reference to Exhibit 10.1(l) of the Company’s Form 10-K (SEC File No. 000-25349) filed on April 12, 2013)15, 2016)* | | | 10.1(h)10.1(i) | Consulting LetterEmployment Agreement, dated May 21, 2014,June 4, 2018, between Anne Jacobsen and the Company and Alan D. Cole. (incorporated by reference to Exhibit 10.1(b)10.1 of the Company’s Form 10-Q (SEC File No. 000-25349) for the quarter ended May 4, 2014)filed on December 6, 2018)* | | | 10.1(i)10.1(j) | | | | 10.2(a)10.1(k) | Employment Agreement, dated June 4, 2018, between Jeremy Hoff and the Company (incorporated by reference to Exhibit 10.3 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)* | | | 10.1(l) | Employment Agreement, dated June 4, 2018, between Douglas Townsend and the Company (incorporated by reference to Exhibit 10.4 of the Company’s Form 10-Q (SEC File No. 000-25349) filed on December 6, 2018)* | | | 10.1(m) | Form of Performance Share Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on May 11, 2018)* | | | 10.2(a) | Amended and Restated Loan Agreement, dated as of February 1, 2016, between Bank of America, N.A., the Company, Bradington-Young, LLC and Same Moore Furniture LLC (incorporated by referenced to Exhibit 10.1 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 2, 20162016) | | | 10.2(b) | Security Agreement (Assignment of Life Insurance Policy as Collateral), dated as of February 1, 2016, between Bank of America, N.A. and the Company (incorporated by referenced to Exhibit 10.2 of the Company’s Current Report on Form 8-K (SEC File No. 000-25349) filed on February 2, 20162016) | | | 2110.2 (c) | Second Amended and Restated Loan Agreement, dated as of September 29, 2017, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K (SEC File No. 000-25349) filed on September 29, 2017) | | | 10.2 (d) | First Amendment to Second Amended and Restated Loan Agreement, dated as of February 1, 2019, between Bank of America, N.A. and Hooker Furniture Corporation, Bradington-Young, LLC, Sam Moore Furniture LLC and Home Meridian Group, LLC. (filed herewith) |
21 | List of Subsidiaries: | | | | Bradington-Young LLC, a North Carolina limited liability company | | Home Meridian Group, LLC, a North Carolina limited liability company | | Sam Moore Furniture LLC, a Virginia limited liability company | | | 23 | | | | 31.1 | | | | 31.2 | | | | 32.1 | | | | 101 | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2016,February 3, 2019, formatted in Extensible Business Reporting Language (“XBRL”): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, (v) consolidated statements of shareholders’ equity and (vi) the notes to the consolidated financial statements, tagged as blocks of text (filed herewith) |
*Management contract or compensatory plan
ITEM 16. FORM 10-K SUMMARY None.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
HOOKER FURNITURE CORPORATION
April 15, 2016 /s/ Paul B. Toms, Jr.
Paul B. Toms, Jr.
Chairman and Chief Executive Officer
| HOOKER FURNITURE CORPORATION | | | | | | April 19, 2019 | By: | /s/ Paul B. Toms, Jr. | | | | Paul B. Toms, Jr. | | | | Chairman and Chief Executive Officer | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature | | Title | | Date | | | | | | /s/ Paul B. Toms, Jr. | | Chairman, Chief Executive Officer and | | April 15, 201619, 2019 | Paul B. Toms, Jr. | | Director (Principal Executive Officer) | | | | | | | | /s/ Paul A. Huckfeldt | | Senior Vice President - Finance and Accounting | | 19, 2019 | Paul A. Huckfeldt | | and Chief Financial Officer (Principal | | | | | Financial and Accounting Officer) | | | | | | | | | | | | | /s/ W. Christopher Beeler, Jr. | | Director | | 19, 2019 | W. Christopher Beeler, Jr. | | | | | | | | | | /s/ Paulette Garafalo | | Director | | April 19, 2019 | Paulette Garafalo | | | | | | | | | | /s/ John L. Gregory, III | | Director | | 19, 2019 | John L. Gregory, III | | | | | | | | | | /s/ Tonya H. Jackson | | Director | | April 19, 2019 | Tonya H. Jackson | | | | | | | | | | /s/ E. Larry Ryder | | Director | | 19, 2019 | E. Larry Ryder | | | | | | | | | | /s/ David G. Sweet | | Director | | | David G. Sweet | | | | | | | | | | /s/ Ellen C. Taaffe
| | Director | | 19, 2019 | | | | | | | | | | | /s/ Henry G. Williamson, Jr. | | Director | | 19, 2019 | Henry G. Williamson, Jr. | | | | | | | | | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | | | | F-2 | | | | F-3 | | | | F-5 | | | | F-6 | | | | F-7 | | | | F-8 | | | | F-9 | | | | F-10 |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Hooker Furniture Corporation
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control—Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on the Company’s evaluation under that framework, management concluded that the Company’s internal control over financial reporting was effective as of January 31, 2016.
February 3, 2019.The effectiveness of the Company’s internal control over financial reporting as of January 31, 2016February 3, 2019 has been audited by KPMG LLP, the Company’s independent registered public accounting firm, as stated in their report which is included herein.
Paul B. Toms, Jr. Chairman and Chief Executive Officer (Principal Executive Officer)
19, 2019
Paul A. Huckfeldt Senior Vice President – Finance and Accounting and Chief Financial Officer (Principal Financial and Accounting Officer) Report of Independent Registered Public Accounting Firm TheTo the Shareholders and Board of Directors and Shareholders
Hooker Furniture Corporation:
Opinion on the ConsolidatedFinancial Statements We have audited the accompanying consolidated balance sheets of Hooker Furniture Corporation and subsidiaries’subsidiaries (the Company) as of February 3, 2019 and January 28, 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended February 3, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 3, 2019 and January 28, 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended February 3, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 31, 2016,February 3, 2019, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, (COSO)and our report dated April 19, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ KPMG LLP We have served as the Company’s auditor since 2003. Raleigh, North Carolina
April 19, 2019
Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors
Hooker Furniture Company: Opinion on Internal Control Over Financial Reporting We have audited Hooker Furniture Corporation and subsidiaries’ (the Company) internal control over financial reporting as of February 3, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 3, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 3, 2019 and January 28, 2018, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended February 3, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated April 19, 2019 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Hooker Furniture Corporation maintained, in all material respects, effective internal control over financial reporting as of January 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hooker Furniture Corporation and subsidiaries as of January 31, 2016 and February 1, 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the fifty-two week periods ended January 31, 2016, February 1, 2015 and February 2, 2014 and our report dated April 15, 2016 expressed an unqualified opinion on those consolidated financial statements.
Charlotte,Raleigh, North Carolina
April 15, 2016
19, 2019Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Hooker Furniture Corporation:
We have audited the accompanying consolidated balance sheets of Hooker Furniture Corporation and subsidiaries as of January 31, 2016 and February 1, 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the fifty-two week periods ended January 31, 2016, February 1, 2015 and February 2, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hooker Furniture Corporation and subsidiaries as of January 31, 2016 and February 1, 2015, and the results of their operations and their cash flows for each of the years in the fifty-two week periods ended January 31, 2016, February 1, 2015 and February 2, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hooker Furniture Corporation’s internal control over financial reporting as of January 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 15, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Charlotte, North Carolina
April 15, 2016
HOOKER FURNITURE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
| As of | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | Assets | | | | | | | | Current assets | | | | | | | | Cash and cash equivalents | | $ | 53,922 | | | $ | 38,663 | | Trade accounts receivable, less allowance for doubtful accounts of $1,032 and $1,329 on each respective date | | | 28,176 | | | | 32,245 | | | Inventories | | | 43,713 | | | | 44,973 | | | Prepaid expenses and other current assets | | | 2,256 | | | | 2,353 | | | Total current assets | | | 128,067 | | | | 118,234 | | | Property, plant and equipment, net | | | 22,768 | | | | 22,824 | | | Cash surrender value of life insurance policies | | | 21,888 | | | | 20,373 | | | Deferred taxes | | | 5,350 | | | | 5,892 | | | Intangible assets | | | 1,382 | | | | 1,382 | | | Other assets | | | 2,198 | | | | 2,050 | | | Total non-current assets | | | 53,586 | | | | 52,521 | | | Total assets | | $ | 181,653 | | | $ | 170,755 | | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | | Current liabilities | | | | | | | | | | Trade accounts payable | | $ | 9,105 | | | $ | 10,293 | | | Accrued salaries, wages and benefits | | | 4,834 | | | | 4,824 | | | Income tax accrual | | | 357 | | | | 1,368 | | | Accrued commissions | | | 818 | | | | 916 | | | Other accrued expenses | | | 694 | | | | 813 | | | Customer deposits | | | 797 | | | | 853 | | | Total current liabilities | | | 16,605 | | | | 19,067 | | | Deferred compensation | | | 8,409 | | | | 8,329 | | | Income tax accrual | | | 166 | | | | 90 | | | Other liabilities | | | 412 | | | | 360 | | | Total long-term liabilities | | | 8,987 | | | | 8,779 | | | Total liabilities | | | 25,592 | | | | 27,846 | | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | Common stock, no par value, 20,000 shares authorized, 10,818 and 10,774 shares issued and outstanding on each date | | | 18,667 | | | | 17,852 | | | Retained earnings | | | 137,255 | | | | 125,392 | | | Accumulated other comprehensive income (loss) | | | 139 | | | | (335 | ) | | Total shareholders’ equity | | | 156,061 | | | | 142,909 | | | Total liabilities and shareholders’ equity | | $ | 181,653 | | | $ | 170,755 | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES | CONSOLIDATED BALANCE SHEETS | (In thousands) |
As of | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Assets | | | | | | | | | Current assets | | | | | | | | | Cash and cash equivalents | | $ | 11,435 | | | $ | 30,915 | | Trade accounts receivable, net (See notes 6 and 7) | | | 112,557 | | | | 92,803 | | Inventories (see note 8) | | | 105,204 | | | | 84,459 | | Prepaid expenses and other current assets | | | 5,735 | | | | 5,314 | | Total current assets | | | 234,931 | | | | 213,491 | | Property, plant and equipment, net | | | 29,482 | | | | 29,249 | | Cash surrender value of life insurance policies (See note 11) | | | 23,816 | | | | 23,622 | | Deferred taxes (See note 16) | | | 4,522 | | | | 3,264 | | Intangible assets, net (See note 10) | | | 35,755 | | | | 38,139 | | Goodwill (See notes 4 and 10) | | | 40,058 | | | | 40,058 | | Other assets | | | 1,152 | | | | 2,235 | | Total non-current assets | | | 134,785 | | | | 136,567 | | Total assets | | $ | 369,716 | | | $ | 350,058 | | | | | | | | | | | | Liabilities and Shareholders’ Equity | | | | | | | | | Current liabilities | | | | | | | | | Current portion of term loans | | $ | 5,829 | | | $ | 7,528 | | Trade accounts payable | | | 40,838 | | | | 32,685 | | Accrued salaries, wages and benefits | | | 8,002 | | | | 9,218 | | Income tax accrual (See note 16) | | | 3,159 | | | | 3,711 | | Customer deposits | | | 3,023 | | | | 4,293 | | Other accrued expenses | | | 3,564 | | | | 2,894 | | Total current liabilities | | | 64,415 | | | | 60,329 | | Long term debt (See note 12) | | | 29,628 | | | | 45,778 | | Deferred compensation (See note 13) | | | 11,513 | | | | 11,164 | | Pension plan (See note 13) | | | - | | | | 2,441 | | Other liabilities | | | 984 | | | | 886 | | Total long-term liabilities | | | 42,125 | | | | 60,269 | | Total liabilities | | | 106,540 | | | | 120,598 | | | | | | | | | | | | Shareholders’ equity | | | | | | | | | Common stock, no par value, 20,000 shares authorized, 11,785 and 11,762 shares issued and outstanding on each date | | | 49,549 | | | | 48,970 | | Retained earnings | | | 213,380 | | | | 180,122 | | Accumulated other comprehensive income | | | 247 | | | | 368 | | Total shareholders’ equity | | | 263,176 | | | | 229,460 | | Total liabilities and shareholders’ equity | | $ | 369,716 | | | $ | 350,058 | |
See accompanying Notes to Consolidated Financial Statements. HOOKER FURNITURE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the 52 Week Periods Ended January 31, 2016, February 1, 2015, and February 2, 2014.
| | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Net sales | | $ | 246,999 | | | $ | 244,350 | | | $ | 228,293 | | | | | | | | | | | | | | | | | Cost of sales | | | 178,311 | | | | 181,550 | | | | 173,568 | | | | | | | | | | | | | | | | | Gross profit | | | 68,688 | | | | 62,800 | | | | 54,725 | | | | | | | | | | | | | | | | | Selling and administrative expenses | | | 44,426 | | | | 43,752 | | | | 42,222 | | | | | | | | | | | | | | | | | Operating income | | | 24,262 | | | | 19,048 | | | | 12,503 | | | | | | | | | | | | | | | | | Other income (expense), net | | | 197 | | | | 350 | | | | (35 | ) | | | | | | | | | | | | | | | | Income before income taxes | | | 24,459 | | | | 19,398 | | | | 12,468 | | | | | | | | | | | | | | | | | Income taxes | | | 8,274 | | | | 6,820 | | | | 4,539 | | | | | | | | | | | | | | | | | Net income | | $ | 16,185 | | | $ | 12,578 | | | $ | 7,929 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | | | Basic | | $ | 1.50 | | | $ | 1.17 | | | $ | 0.74 | | | Diluted | | $ | 1.49 | | | $ | 1.16 | | | $ | 0.74 | | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | | Basic | | | 10,779 | | | | 10,736 | | | | 10,722 | | | Diluted | | | 10,807 | | | | 10,771 | | | | 10,752 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash dividends declared per share | | $ | 0.40 | | | $ | 0.40 | | | $ | 0.40 | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF INCOME | (In thousands, except per share data) | | For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017. |
| | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | Net sales | | $ | 683,501 | | | $ | 620,632 | | | $ | 577,219 | | | | | | | | | | | | | | | | Cost of sales | | | 536,014 | | | | 485,815 | | | | 451,098 | | Casualty loss | | | 500 | | | | - | | | | - | | | | | | | | | | | | | | | | Gross profit | | | 146,987 | | | | 134,817 | | | | 126,121 | | | | | | | | | | | | | | | | Selling and administrative expenses | | | 91,928 | | | | 87,279 | | | | 83,186 | | Intangible asset amortization | | | 2,384 | | | | 2,084 | | | | 3,134 | | | | | | | | | | | | | | | | Operating income | | | 52,675 | | | | 45,454 | | | | 39,801 | | | | | | | | | | | | | | | | Other income, net | | | 369 | | | | 1,566 | | | | 349 | | Interest expense, net | | | 1,454 | | | | 1,248 | | | | 954 | | | | | | | | | | | | | | | | Income before income taxes | | | 51,590 | | | | 45,772 | | | | 39,196 | | | | | | | | | | | | | | | | Income taxes | | | 11,717 | | | | 17,522 | | | | 13,909 | | | | | | | | | | | | | | | | Net income | | $ | 39,873 | | | $ | 28,250 | | | $ | 25,287 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings per share: | | | | | | | | | | | | | Basic | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.19 | | Diluted | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.18 | | | | | | | | | | | | | | | | Weighted average shares outstanding: | | | | | | | | | | | | | Basic | | | 11,759 | | | | 11,633 | | | | 11,531 | | Diluted | | | 11,783 | | | | 11,663 | | | | 11,563 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash dividends declared per share | | $ | 0.57 | | | $ | 0.50 | | | $ | 0.42 | |
See accompanying Notes to Consolidated Financial Statements. HOOKER FURNITURE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the 52 Week Periods Ended January 31, 2016, February 1, 2015, and February 2, 2014.
| | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Net Income | | $ | 16,185 | | | $ | 12,578 | | | $ | 7,929 | | | Other comprehensive income (loss): | | | | | | | | | | | | | | Amortization of actuarial gain (loss) | | | 751 | | | | (687 | ) | | | (163 | ) | | Income tax effect on amortization | | | (277 | ) | | | 254 | | | | 59 | | | Adjustments to net periodic benefit cost | | | 474 | | | | (433 | ) | | | (104 | ) | | | | | | | | | | | | | | | | Total Comprehensive Income | | $ | 16,659 | | | $ | 12,145 | | | $ | 7,825 | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | (In thousands) | | For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017. |
| | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | Net Income | | $ | 39,873 | | | $ | 28,250 | | | $ | 25,287 | | Other comprehensive income (loss): | | | | | | | | | | | | | Amortization of actuarial (loss) gain | | | (305 | ) | | | (144 | ) | | | 551 | | Income tax effect on amortization | | | 73 | | | | 26 | | | | (204 | ) | Adjustments to net periodic benefit cost | | | (232 | ) | | | (118 | ) | | | 347 | | | | | | | | | | | | | | | | Reclassification of tax effects due to the adoption of ASU 2018-02 | | | 111 | | | | - | | | | - | | | | | | | | | | | | | | | | Total Comprehensive Income | | $ | 39,752 | | | $ | 28,132 | | | $ | 25,634 | |
See accompanying Notes to Consolidated Financial Statements. HOOKER FURNITURE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the 52 Week Periods Ended January 31, 2016, February 1, 2015, and February 2, 2014.
| | | 2016 | | | 2015 | | | 2014 | | | Operating Activities: | | | | | | | | | | | Net income | | $ | 16,185 | | | $ | 12,578 | | | $ | 7,929 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | Depreciation and amortization | | | 2,946 | | | | 2,599 | | | | 2,491 | | | Loss / (gain) on disposal of assets | | | 83 | | | | (23 | ) | | | (8 | ) | | Deferred income tax expense | | | 544 | | | | (135 | ) | | | 340 | | | Non-cash restricted stock and performance awards | | | 829 | | | | 123 | | | | 338 | | | Provision for doubtful accounts | | | (105 | ) | | | 928 | | | | 456 | | | Changes in assets and liabilities | | | | | | | | | | | | | | Trade accounts receivable | | | 4,174 | | | | (3,780 | ) | | | (1,576 | ) | | Income tax recoverable | | | - | | | | 682 | | | | (682 | ) | | Inventories | | | 1,260 | | | | 4,043 | | | | 856 | | | Gain on life insurance policies | | | (799 | ) | | | (709 | ) | | | (147 | ) | | Prepaid expenses and other current assets | | | (207 | ) | | | (76 | ) | | | 30 | | | Trade accounts payable | | | (1,273 | ) | | | 3,216 | | | | (4,499 | ) | | Accrued salaries, wages and benefits | | | 273 | | | | 1,347 | | | | 162 | | | Accrued income taxes | | | (1,011 | ) | | | 1,368 | | | | (751 | ) | | Accrued commissions | | | (98 | ) | | | (18 | ) | | | (62 | ) | | Customer deposits | | | (56 | ) | | | 194 | | | | 659 | | | Other accrued expenses | | | (119 | ) | | | 56 | | | | (31 | ) | | Deferred compensation | | | 358 | | | | 317 | | | | 88 | | | Other long-term liabilities | | | 52 | | | | 58 | | | | 103 | | | Net cash provided by operating activities | | | 23,036 | | | | 22,768 | | | | 5,696 | | | | | | | | | | | | | | | | | Investing Activities: | | | | | | | | | | | | | | Purchases of property, plant and equipment | | | (2,847 | ) | | | (2,994 | ) | | | (3,471 | ) | | Proceeds received on notes receivable | | | 93 | | | | 31 | | | | 36 | | | Proceeds from sale of property and equipment | | | 6 | | | | 71 | | | | 22 | | | Purchase of intangible | | | - | | | | - | | | | (125 | ) | | Premiums paid on life insurance policies | | | (707 | ) | | | (789 | ) | | | (834 | ) | | Proceeds received on life insurance policies | | | - | | | | - | | | | 517 | | | Net cash used in investing activities | | | (3,455 | ) | | | (3,681 | ) | | | (3,855 | ) | | | | | | | | | | | | | | | | Financing Activities: | | | | | | | | | | | | | | Cash dividends paid | | | (4,322 | ) | | | (4,306 | ) | | | (4,301 | ) | | Net cash used in financing activities | | | (4,322 | ) | | | (4,306 | ) | | | (4,301 | ) | | | | | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 15,259 | | | | 14,781 | | | | (2,460 | ) | | Cash and cash equivalents at the beginning of year | | | 38,663 | | | | 23,882 | | | | 26,342 | | | Cash and cash equivalents at the end of year | | $ | 53,922 | | | $ | 38,663 | | | $ | 23,882 | | | | | | | | | | | | | | | | | Supplemental schedule of cash flow information: | | | | | | | | | | | | | | Income taxes paid, net | | $ | 8,837 | | | $ | 4,696 | | | $ | 5,534 | | | | | | | | | | | | | | | | | Supplemental schedule of noncash investing activities: | | | | | | | | | | | | | | Increase in property and equipment through accrued purchases | | $ | 85 | | | | - | | | $ | 43 | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF CASH FLOWS | (In thousands) | | For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017. |
| | | 2019 | | | 2018 | | | 2017 | | Operating Activities: | | | | | | | | | | | | | Net income | | $ | 39,873 | | | $ | 28,250 | | | $ | 25,287 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Depreciation and amortization | | | 7,442 | | | | 6,647 | | | | 8,000 | | (Gain)/Loss on disposal of assets | | | (73 | ) | | | 571 | | | | (72 | ) | Proceeds from Casualty Loss | | | 409 | | | | - | | | | - | | Deferred income tax (benefit) expense | | | (1,221 | ) | | | 4,110 | | | | (2,224 | ) | Non-cash restricted stock and performance awards | | | 1,284 | | | | 1,175 | | | | 1,157 | | Provision for doubtful accounts and sales allowances | | | (799 | ) | | | (531 | ) | | | 2,188 | | Gain on life insurance policies | | | (748 | ) | | | (582 | ) | | | (964 | ) | Changes in assets and liabilities: | | | | | | | | | | | | | Trade accounts receivable | | | (17,982 | ) | | | 2,908 | | | | (20,467 | ) | Inventories | | | (21,323 | ) | | | (6,776 | ) | | | 6,016 | | Prepaid expenses and other current assets | | | 267 | | | | (1,067 | ) | | | (115 | ) | Trade accounts payable | | | 8,130 | | | | (4,623 | ) | | | 4,662 | | Accrued salaries, wages and benefits | | | (1,643 | ) | | | 129 | | | | 1,950 | | Accrued income taxes | | | (672 | ) | | | (612 | ) | | | 3,966 | | Customer deposits | | | (1,270 | ) | | | (339 | ) | | | 1,147 | | Other accrued expenses | | | 604 | | | | (696 | ) | | | 2,303 | | Deferred compensation | | | (2,757 | ) | | | (1,151 | ) | | | (1,715 | ) | Other long-term liabilities | | | 141 | | | | 333 | | | | 121 | | Net cash provided by operating activities | | | 9,662 | | | | 27,746 | | | | 31,240 | | | | | | | | | | | | | | | | Investing Activities: | | | | | | | | | | | | | Acquisitions | | | - | | | | (32,773 | ) | | | (86,062 | ) | Purchases of property, plant and equipment | | | (5,214 | ) | | | (3,166 | ) | | | (2,454 | ) | Proceeds received on notes receivable | | | 119 | | | | 120 | | | | 146 | | Proceeds from sale of property and equipment | | | 11 | | | | 9 | | | | 2 | | Premiums paid on life insurance policies | | | (652 | ) | | | (673 | ) | | | (715 | ) | Proceeds received on life insurance policies | | | 1,225 | | | | - | | | | 1,022 | | Net cash used in investing activities | | | (4,511 | ) | | | (36,483 | ) | | | (88,061 | ) | | | | | | | | | | | | | | | Financing Activities: | | | | | | | | | | | | | Proceeds from long-term debt | | | - | | | | 12,000 | | | | 60,000 | | Payments for long-term debt | | | (17,917 | ) | | | (6,285 | ) | | | (12,290 | ) | Debt issuance cost | | | - | | | | (39 | ) | | | (165 | ) | Cash dividends paid | | | (6,714 | ) | | | (5,816 | ) | | | (4,854 | ) | Net cash (used in) provided by financing activities | | | (24,631 | ) | | | (140 | ) | | | 42,691 | | | | | | | | | | | | | | | | Net decrease in cash and cash equivalents | | | (19,480 | ) | | | (8,877 | ) | | | (14,130 | ) | Cash and cash equivalents at the beginning of year | | | 30,915 | | | | 39,792 | | | | 53,922 | | Cash and cash equivalents at the end of year | | $ | 11,435 | | | $ | 30,915 | | | $ | 39,792 | | | | | | | | | | | | | | | | Supplemental schedule of cash flow information: | | | | | | | | | | | | | Interest paid, net | | $ | 1,338 | | | $ | 1,135 | | | | 848 | | Income taxes paid, net | | | 13,613 | | | | 14,122 | | | $ | 12,164 | | | | | | | | | | | | | | | | Supplemental schedule of noncash investing activities: | | | | | | | | | | | | | Acquisition cost paid in common stock | | $ | - | | | $ | 8,396 | | | | 20,267 | | Increase in property and equipment through accrued purchases | | | 23 | | | | 58 | | | | - | |
See accompanying Notes to Consolidated Financial Statements. HOOKER FURNITURE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
For the 52 Week Periods Ended January 31, 2016, February 1, 2015 and February 2, 2014.
| | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | Other | | | Total | | | | | Common Stock | | | Retained | | | Comprehensive | | | Shareholders' | | | | | Shares | | | Amount | | | Earnings | | | Income | | | Equity | | | Balance at February 3, 2013 | | | 10,746 | | | $ | 17,360 | | | $ | 113,483 | | | $ | 202 | | | $ | 131,045 | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | 7,929 | | | | - | | | | 7,929 | | Unrealized loss on defined benefit plan, net of tax of $59 | | | - | | | | - | | | | - | | | | (104 | ) | | | (104 | ) | | Cash dividends paid and accrued ($0.40 per share) | | | - | | | | - | | | | (4,301 | ) | | | - | | | | (4,301 | ) | | Restricted stock grants, net of forfeitures | | | 7 | | | | (8 | ) | | | 9 | | | | - | | | | - | | | Restricted stock compensation cost | | | - | | | | 233 | | | | - | | | | - | | | | 233 | | | Balance at February 2, 2014 | | | 10,753 | | | $ | 17,585 | | | $ | 117,120 | | | $ | 98 | | | $ | 134,803 | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | 12,578 | | | | - | | | | 12,578 | | Unrealized loss on defined benefit plan, net of tax of $254 | | | - | | | | - | | | | - | | | | (433 | ) | | | (433 | ) | | Cash dividends paid and accrued ($0.40 per share) | | | - | | | | - | | | | (4,306 | ) | | | - | | | | (4,306 | ) | | Restricted stock grants, net of forfeitures | | | 21 | | | | 51 | | | | - | | | | - | | | | 51 | | | Restricted stock compensation cost | | | - | | | | 216 | | | | - | | | | - | | | | 216 | | | Balance at February 1, 2015 | | | 10,774 | | | $ | 17,852 | | | $ | 125,392 | | | $ | (335 | ) | | $ | 142,909 | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | - | | | | - | | | | 16,185 | | | | - | | | | 16,185 | | | Unrealized loss on defined benefit plan, net of tax of $(277) | | | - | | | | - | | | | - | | | | 474 | | | | 474 | | | Cash dividends paid and accrued ($0.40 per share) | | | - | | | | - | | | | (4,322 | ) | | | - | | | | (4,322 | ) | | Restricted stock grants, net of forfeitures | | | 44 | | | | 563 | | | | - | | | | - | | | | 563 | | | Restricted stock compensation cost | | | - | | | | 252 | | | | - | | | | - | | | | 252 | | | Balance at January 31, 2016 | | | 10,818 | | | $ | 18,667 | | | $ | 137,255 | | | $ | 139 | | | $ | 156,061 | |
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES | CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | (In thousands, except per share data) | | For the 53 Week Period Ended February 3, 2019 and the 52 Week Periods Ended January 28, 2018 and January 29, 2017. |
| | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | | | | | | | Other | | | Total | | | | | Common Stock | | | Retained | | | Comprehensive | | | Shareholders' | | | | | Shares | | | Amount | | | Earnings | | | Income | | | Equity | | Balance at January 31, 2016 | | | 10,818 | | | $ | 18,667 | | | $ | 137,255 | | | $ | 139 | | | $ | 156,061 | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 25,287 | | | | | | | | 25,287 | | Unrealized gain on defined benefit plan, net of tax of $204 | | | | | | | | | | | | | | | 347 | | | | 347 | | Cash dividends paid and accrued ($0.42 per share) | | | | | | | | | | | (4,854 | ) | | | | | | | (4,854 | ) | Stock issued for acquisition | | | 717 | | | | 20,267 | | | | | | | | | | | | 20,267 | | Restricted stock grants, net of forfeitures | | | 28 | | | | 423 | | | | | | | | | | | | 423 | | Restricted stock compensation cost | | | | | | | 396 | | | | | | | | | | | | 396 | | Balance at January 29, 2017 | | | 11,563 | | | $ | 39,753 | | | $ | 157,688 | | | $ | 486 | | | $ | 197,927 | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | | 28,250 | | | | | | | | 28,250 | | Unrealized loss on defined benefit plan, net of tax of $26 | | | | | | | | | | | | | | | (118 | ) | | | (118 | ) | Cash dividends paid and accrued ($0.50 per share) | | | | | | | | | | | (5,816 | ) | | | | | | | (5,816 | ) | Stock issued for acquisition | | | 176 | | | | 8,396 | | | | | | | | | | | | 8,396 | | Restricted stock grants, net of forfeitures | | | 23 | | | | 432 | | | | | | | | | | | | 432 | | Restricted stock compensation cost | | | | | | | 389 | | | | | | | | | | | | 389 | | Balance at January 28, 2018 | | | 11,762 | | | $ | 48,970 | | | $ | 180,122 | | | $ | 368 | | | $ | 229,460 | | | | | | | | | | | | | | | | | | | | | | | | Net income | | | | | | | | | | $ | 39,873 | | | | | | | $ | 39,873 | | Prior year adjustment for ASU 2014-09 and 2018-02 | | | | | | | | | | | 99 | | | $ | 111 | | | | 210 | | Unrealized loss on defined benefit plan, net of tax of $73 | | | | | | | | | | | | | | | (232 | ) | | | (232 | ) | Cash dividends paid and accrued ($0.57 per share) | | | | | | | | | | | (6,714 | ) | | | | | | | (6,714 | ) | Restricted stock grants, net of forfeitures | | | 23 | | | $ | (30 | ) | | | | | | | | | | | (30 | ) | Restricted stock compensation cost | | | | | | $ | 609 | | | | | | | | | | | | 609 | | Balance at February 3, 2019 | | | 11,785 | | | $ | 49,549 | | | $ | 213,380 | | | $ | 247 | | | $ | 263,176 | |
See accompanying Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements
HOOKER FURNITURE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TablesDollar and share amounts in thousands,tables, except per share data) amounts, in thousands unless otherwise indicated)For the Fifty-Three Weeks Ended February 3, 2019 NOTE 1 – ACCOUNTING STANDARDS ADOPTED IN FISCAL 2019 In February 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). The new guidance allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 was issued in response to concerns regarding current accounting guidance that requires deferred tax assets and liabilities to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date, even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income, rather than net income. Consequently, the stranded tax effects would not reflect the appropriate tax rate. The amendments of this ASU allow an entity to make a reclassification from accumulated other comprehensive income to retained earnings for the stranded tax effects, which is the difference between the historical federal corporate income tax rate of 35.0% and the newly enacted corporate income tax rate of 21.0%. We adopted ASU 2018-02 in the first quarter of fiscal 2019. The adoption resulted in the reclassification of $111,000 from accumulated other comprehensive income to retained earnings in the first quarter of fiscal 2019. In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 was issued to provide clarity and reduce diversity in practice, cost and complexity when applying the guidance in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. Essentially, an entity will not have to account for the effects of a modification if: (a) the fair value of the modified award is the same immediately before and after the modification; (b) the vesting conditions of the modified award are the same immediately before and after the modification; and (c) the classification of the modified award as either an equity instrument or liability instrument is the same immediately before and after the modification. We adopted the amendments in ASU 2017-09 as of the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not have an impact upon our financial condition or results of operations. In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”).Previously net benefit cost was reported as an employee cost within operating income. The amendment requires the bifurcation of net benefit cost. The service cost component will be presented with the other employee compensation costs in operating income. The other components will be reported separately outside of operations and will not be eligible for capitalization. The amendment is effective for public entities for the annual reporting period beginning after December 15, 2017. The guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost (including gains and losses on curtailments and settlements, and termination benefits paid through plans), and on a prospective basis for the capitalization of only the service cost component of net benefit cost. Amounts capitalized into assets prior to the date of adoption should not be adjusted through a cumulative effect adjustment, but should continue to be recognized in the normal course, as for example, inventory is sold or fixed assets are depreciated. We adopted ASU 2017-17 as of the beginning of our 2019 fiscal year on January 29, 2018. Please see Note 13 Employee Benefit Plans for the impact on our financial statements. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 provides a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) does not constitute a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in ASU 2017-01 (a) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (b) remove the evaluation of whether a market participant could replace missing elements. The amendments in ASU 2017-01 apply prospectively and became effective for us at the beginning of our 2019 fiscal year on January 29, 2018. The adoption of this guidance did not impact our financial statements. In August 2016, the FASB issued ASU 2016-15, 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. In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This new standard replaced most existing revenue recognition guidance in GAAP and codified guidance under FASB Topic 606. The underlying principle of this new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. We adopted ASU No. 2014-09 as of January 29, 2018 using the modified retrospective method. As a result of adopting Topic 606, we recorded an increase to retained earnings of approximately $210,000, net of tax, as of January 29, 2018, due to the cumulative effect related to the change in accounting for shipments with synthetic FOB destination shipping terms. Results for the reporting period beginning after January 29, 2018 are presented under Topic 606, while prior period amounts continue to be reported in accordance with the Company's historic accounting practices under previous guidance. However, given the nature of our products and our sales terms and conditions, with the exception of sales with synthetic FOB destination shipping terms which are immaterial, the timing and amount of revenue recognized based on the underlying principles of ASU No. 2014-09 are consistent with our revenue recognition policy under previous guidance. NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hooker Furniture Corporation and subsidiaries (the “Company,” “we,” “us” and “our”) design, import, manufacture and market residential household furniture, hospitality and contract furniture for sale to wholesale and retail merchandisers located principally in North America.
The consolidated financial statements include the accounts of Hooker Furniture Corporation and our wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. All references to the Company refer to the Company and our consolidated subsidiaries, unless specifically referring to segment information. For comparative purposes, certain amounts in Operating Segments As a public entity, we are required to present disaggregated information by segment using the consolidatedmanagement 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 notes have been reclassifiedmakes decisions. The management approach requires segment information to conformbe 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 fiscal 2016 presentation.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. F-11
Segments
WeFor financial reporting purposes, we are organized into threetwo operating segments – casegoods, upholstery and an All Other segment. The upholstery segment consists“All Other”, which includes the remainder of Bradington-Young, Sam Moore Furniture and Hooker Upholstery. The All Other segment consists of H Contract and Homeware.
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, Shenandoah Furniture, H Contract and Homeware, two businesses started in 2013. None of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280. |
Cash and Cash Equivalents
We temporarily invest unusedconsider cash balanceson hand, demand deposits in a high quality, diversified money market fund that provides for daily liquiditybanks and pays dividends monthly. Cash equivalents are stated at cost plus accrued interest, which approximates fair value.
all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents.Trade Accounts Receivable
Accounts receivable are reported net of the allowance for doubtful accounts and sales-related allowances. Substantially all of our trade accounts receivable are due from retailers and dealers that sell residential home furnishings or commercial purchasers of our hospitality and senior living products, and consist of a large number of entities with a broad geographic dispersion. We perform credit evaluations of our customers and generally do not require collateral. We regularly review and revise accounts receivable for doubtful accounts and customer allowances based upon historical bad debts and customer allowances and any agreements with specific customers. If the financial condition of a customer or customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt allowances may be required. In the event a receivable is determined to be potentially uncollectible, we engage collection agencies or law firms to attempt to collect amounts owed to us after all internal collection attempts have ended. Once we have determined the receivable is uncollectible, it is charged against the allowance for doubtful accounts. Bradington-Young factors substantially all Business Combinations-Purchase Price Allocation For business combinations, we allocate the purchase price to the various tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. Determining the fair value of their receivablescertain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions, which are inherently uncertain. Many of the estimates and assumptions used to determine fair values, such as those used for intangible assets, are made based on forecasted information and discount rates. To assist in the purchase price allocation process, as well as the estimate of remaining useful lives of acquired assets, we may engage a non-recourse basis. Accounts receivable are reported netthird-party appraisal firm. In addition, the judgments made in determining the estimated fair value assigned to each class of allowance for doubtful accounts.
assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations.Fair Value Measurements
We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. We determine fair value based on assumptions that we believe market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: | §■ | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| §■ | Level 2 Inputs: Observable inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| §■ | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. |
Fair Value of Financial Instruments The carrying value for eachof certain of our financial instruments (consisting of cash(cash and cash equivalents, trade accounts receivable and payable, and accrued liabilities) approximates fair value because of the short-term nature of those instruments. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
All inventories are stated at the lower of cost, or market value, with cost determined using the last-in, first-out (LIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less allowances for depreciation. Provision for depreciation has been computed at annual rates using straight-line or declining balance depreciation methods that will amortize the cost of the depreciable assets over their estimated useful lives.
Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment and definite-lived assets, are evaluated for impairment annually or more frequently when events or changes in circumstances indicate that the carrying amount of the assets or asset groups may not be recoverable through the estimated undiscounted future cash flows from the use of those assets. When any such impairment exists, the related assets are written down to fair value. Long-lived assets subject to disposal by sale are measured at the lower of their carrying amount or fair value less estimated cost to sell, are no longer depreciated, and are reported separately as “assets held for sale” in the consolidated balance sheets.
and GoodwillWe own certainboth definite-lived (amortizable) assets and indefinite-lived intangible assets. Our amortizable intangible assets are related to our upholstery segmentthe Shenandoah and all other segment.Home Meridian acquisitions and includes customer relationships and trademarks. Our indefinite lived assets include goodwill related to the Shenandoah and Home Meridian acquisitions, as well as the Bradington-Young and Sam Moore tradenames. We may acquire additional amortizable assets and/or indefinite lived intangible assets in the future. Our indefinite-lived intangible assets are trademarks, trade names and a URL, which are not amortized but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. The fair value of our indefinite-lived intangible assets is determined based on the estimated earnings Our goodwill, trademarks and cash flow capacity of those assets. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible assets with their carrying amount. If the carrying amount of the indefinite-lived intangible assets exceeds their fair value, an impairment loss is recognized in an amount equal to that excess.
Tradetrade names are tested for impairment annually as of the first day of our fiscal fourth quarter or more frequently if events or changes in circumstances indicate that the asset might be impaired. Circumstances that could indicate a potential impairment include:
include, but are not limited to: | §■ | a significant adverse change in the economic or business climate either within the furniture industry or the national or global economy; |
| §■ | significant changes in demand for our products; |
| §■ | loss of key personnel; and |
| §■ | the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise subject to disposal. |
The assumptions used to determine the fair value of our intangible assets are highly subjective involve significant judgmentand judgmental and include long termlong-term growth rates, sales volumes, projected revenues, assumed royalty rates and various factors used to develop an applied discount rate. If the assumptions that we use in these calculations differ from actual results, we may realize additional impairment ofon our intangible assets whichthat may have a material adversematerial-adverse effect on our results of operations and financial condition.
Cash Surrender Value of Life Insurance Policies
We own eighty-seveneighty life insurance policies on certain of our current and former executives and other key employees. These policies havehad a carrying value of approximately $22$23.8 million at February 3, 2019 and have a face value of approximately $35 million.$52 million as of that date. Proceeds from the policies are used to fund certain employee benefits and for other general corporate purposes. We account for life insurance as a component of employee benefits cost. Consequently, the cost of the coverage and any resulting gains or losses related to those insurance policies are recorded as a decrease or increase to operating income. Cash payments that increase the cash surrender value of these policies are classified as investing outflows on the Consolidated Statements of Cash Flows, with amounts paid in excess of the increase in cash surrender value included in operating activities. Gains on life insurance policies, which typically occur at the time a policy is redeemed, are included in the reconciliation of net income to net cash used in or provided by operating activities. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
We recognize revenue pursuant to Accounting Standards Codification 606, which requires revenue to be recognized at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our salespolicy is to record revenue is recognized when title andcontrol of the risk of loss passgoods transfers to the customer, which typically occurscustomer. We have a present right to payment at the time of shipment.shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control. In some cases however, title doesthe very limited instances when products are sold under consignment arrangements, we do not passrecognize revenue until the shipment is deliveredcontrol over such products has transferred to the customer. Salesend consumer. Orders are generally non-cancellable once loaded into a shipping trailer or container. The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period. Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products and are recorded net of allowances for trade promotions, estimated product returns, rebate advertising programs and other discounts.
Physical product returns are very rare due to the high probability of damages to our products in return transit. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.Cost of Sales
The major components of cost of sales are: | §■ | the cost of imported products purchased for resale; |
| §■ | raw materials and supplies used in our domestically manufactured products; |
| §■ | labor and overhead costs associated with our domestically manufactured products; |
| §■ | the cost of our foreign import operations; |
| §■ | charges associated with our inventory reserves; |
| §■ | warehousing and certain shipping and handling costs; and |
| §■ | all other costs required to be classified as cost of sales. |
Selling and Administrative Expenses
The major components of our selling and administrative expenses are: | §■ | the cost of our marketing and merchandising efforts, including showroom expenses; |
| §■ | sales and design commissions; |
| §■ | the costs of administrative support functions including, executive management, information technology, human resources and finance; and |
| §■ | all other costs required to be classified as selling and administrative expenses. |
We offer advertising programs to qualified dealers under which we may provide signage, catalogs and other marketing support to our dealers and may reimburse some advertising and other costs incurred by our dealers in connection with promoting our products. The cost of these programs does not exceed the fair value of the benefit received. We charge the cost of point-of-purchase materials (including signage, catalogs, and catalogs)fabric and leather swatches) to selling and administrative expense as incurred. Advertising costs charged to selling and administrative expense for fiscal years 2016, 20152019, 2018 and 20142017 were $2.3$3.3 million, $2.0$3.0 million, and $2.2$3.2 million, respectively. The costs for other advertising allowance programs are charged against net sales. We also have arrangements with some dealers to reimburse them for a portion of their advertising costs, which provides advertising benefits to us. Costs for these arrangements are expensed as incurred and are netted against revenuesnet sales in our consolidated statements of income and comprehensive income.
At times, tax law and generally accepted accounting principles differ in the treatment of certain income and expense items. These items may be excluded or included in taxable income at different times than is required for GAAP or “book” reporting purposes. These differences may be permanent or temporary in nature.
We determine our annual effective income tax rate based on forecasted pre-tax book income and forecasted permanent book and tax differences. The rate is established at the beginning of the year and is evaluated on a quarterly basis. We consider the level and mix of income of our separate legal entities, statutory tax rates, business credits available in the various jurisdictions in which we operate and permanent tax differences. Significant judgment is required in evaluating tax positions that affect the annual tax rate. Any changes to the forecasted information may cause adjustments to the effective rate. Additional tax, interest and penalties associated with uncertain tax positions are recognized in tax expense on a quarterly basis. To the extent any book and tax differences are temporary in nature, that is, the book realization will occur in a different period than the tax realization, a deferred tax asset or liability is established. To the extent a deferred tax asset is created, we evaluate our ability to realize this asset. If we determine that we will not be able to fully utilize deferred tax assets, we establish a valuation reserve. In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences reverse.
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
We early adopted Accounting Standards Update No. 2015-17 (ASU 2015-17), Balance Sheet Classification of Deferred Taxes in the fourth quarter of fiscal 2016 and have applied retrospective treatment of the standard. Consequently, all All deferred tax assets and liabilities are classified as non-current on our consolidated balance sheets We feel the classification of all deferred tax assets and liabilities as noncurrent provides a more informative disclosure because many of our deferred tax items are by definition short-term, however are of a recurring nature and tend to behave more like non-current assets or liabilities. The retrospective reclassification results in a reduction in current assets of $1.7 million and an increase in non-current assets of the same amount for the period ended February 1, 2015.
sheets.Earnings Per Share
We use the two classtwo-class method to compute basic earnings per share. Under this method we allocate earnings to common shares and participating securities according to their participation rights in dividends declared and undistributed earnings and divide the income available to each class by the weighted average number of common shares for the period in each class. Unvested restricted stock grants made to our non-employee directors and certain employees are considered participating securities because the shares have the right to receive non-forfeitable dividends. Because the participating shares have no obligation to share in net losses, we do not allocate losses to our common shares in this calculation.
Diluted earnings per share reflect the potential dilutive effect of securities that could share in our earnings. Restricted stock awarded to non-employee directors and certain employees and restricted stock units granted to employees that have not yet vested are considered when computing diluted earnings per share. We use the treasury stock method to determine the dilutive effect of both unvested restricted stock and unvested restricted stock units. Shares of unvested restricted stock and unvested restricted stock units under a stock-based compensation arrangement are considered options for purposes of computing diluted earnings per share and are considered outstanding shares as of the grant date for purposes of computing diluted earnings per share even though their exercise may be contingent upon vesting. Those stock-based awards are included in the diluted earnings per share computation even if the non-employee director may be required to forfeit the stock at some future date, or no shares may ever be issued to the employees. Unvested restricted stock and unvested restricted stock units are not included in outstanding common shares in computing basic earnings per share.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of: (i) assets and liabilities, including disclosures regarding contingent assets and liabilities at the dates of the financial statements; and (ii) revenue and expenses during the reported periods. Significant items subject to such estimates and assumptions include the useful lives of fixed and intangible assets; allowance for doubtful accounts; deferred tax assets; the valuation of fixed assets;assets and goodwill; our pension and supplemental retirement income plan;plans; and stock-based compensation. These estimates and assumptions are based on our best judgments. We evaluate these estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which we believe to be reasonable under the circumstances. We adjust our estimates and assumptions as facts and circumstances dictate. Actual results could differ from our estimates. F-15
NOTE 2-3- FISCAL YEAR
Our fiscal years end on the Sunday closest to January 31. In some years, generally once every six years, the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. For example, the 2013The 2019 fiscal year that ended on February 3, 20132019 was a 53-week fiscal year. Our quarterly periods are based on thirteen-week “reporting periods,” which end on Sundays. As a result, each quarterly period generally will be thirteen weeks, or 91 days long, except as noted above.
during a 53-week fiscal year which will have 14 weeks in the fourth quarter.In the notes to the consolidated financial statements, references to the: | §■ | 20162019 fiscal year and comparable terminology mean the fiscal year that began January 29, 2018 and ended February 3, 2019; | | ■ | 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and ended January 28, 2018; and | | ■ | 2017 fiscal year and comparable terminology mean the fiscal year that began February 2, 20151, 2016 and ended January 31, 2016;29, 2017. |
| § | 2015 fiscal year and comparable terminology mean the fiscal year that began February 3, 2014 and ended February 1, 2015; and |
| § | 2014 fiscal year and comparable terminology mean the fiscal year that began February 4, 2013 and ended February 2, 2014. |
NOTE 4-ACQUISITIONS Shenandoah Acquisition On September 29, 2017, we completed the previously announced acquisition (the “Shenandoah acquisition”) of substantially all of the assets of Shenandoah Furniture, Inc. pursuant to the Asset Purchase Agreement the Company and SFI entered into on September 6, 2017 (the “Asset Purchase Agreement”). Upon completion and including post-closing working capital adjustments, the Company paid $32.8 million in cash (the “Cash Consideration”) and issued 176,018 shares of the Company’s common stock (the “Stock Consideration”) to the shareholders of SFI as consideration for the Shenandoah acquisition. The Cash Consideration included an additional payment of approximately $770,000 pursuant to working capital adjustments provided for in the Asset Purchase Agreement. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45). Under the Asset Purchase Agreement, we also assumed certain assets and liabilities of SFI. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of SFI. Also on September 29, 2017, we entered into a second amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the Shenandoah acquisition. The Loan Agreement amends and restates the amended and restated loan agreement the Company entered into with BofA on February 1, 2016, in connection with its acquisition of substantially all of the assets of Home Meridian International, Inc. The Amended and Restated Loan Agreement provides us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan in connection with the completion of the Shenandoah acquisition. For additional details regarding the Loan Agreement, see Note 12. “Long-Term Debt,” below. In accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Shenandoah acquisition has been accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from SFI at their respective fair values at the date of completion of the acquisition. The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill. The following table summarizes the estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Shenandoah acquisition as of September 29, 2017. Purchase price consideration | | | | | Cash paid for assets acquired, including working capital adjustment | | $ | 32,773 | | Value of shares issued for assets acquired | | | 8,000 | | Fair value adjustment to shares issued for assets acquired* | | | 396 | | Total purchase price | | $ | 41,169 | | | | | | | | Fair value estimates of assets acquired and liabilities assumed | | | | | Accounts receivable | | $ | 3,576 | | Inventory | | | 2,380 | | Prepaid expenses and other current assets | | | 52 | | Property and equipment | | | 5,401 | | Intangible assets | | | 14,300 | | Goodwill | | | 16,871 | | Accounts payable | | | (699 | ) | Accrued expenses | | | (712 | ) | Total purchase price | | $ | 41,169 | |
*As provided by the Asset Purchase Agreement, we calculated the number of common shares issued to SFI by dividing $8 million by the mean closing price of our common stock for the ten trading days immediately preceding the business day immediately preceding the closing date ($45.45). However, U.S. Generally Accepted Accounting Standards provide that we value stock consideration exchanged in the Shenandoah acquisition at fair value. Consequently, we adjusted the purchase price by $396,000, which represents the difference in the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45) and the price on September 29, 2017, multiplied by the number of common shares issued (176,018.) No additional consideration was transferred to SFI as a result of this adjustment. During the fiscal 2018 fourth quarter, we paid $123,000 cash for the post-closing working capital adjustment which increased the purchase price by that same amount. Additionally, we (i) refined our estimates of the values of certain intangible assets which increased intangible assets by $1.1 million, (ii) recorded additional accrued expenses of $123,000 and (iii) decreased property and equipment by $17,000. These adjustments decreased goodwill by $774,000. Property and equipment were recorded at fair value and primarily consist of machinery and equipment and leasehold improvements. Property and equipment will be amortized over their estimated useful lives and leasehold improvements will be amortized over the lesser of their useful lives or the remaining lease period. Goodwill is calculated as the excess of the purchase price over the fair value net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. All goodwill is expected to be deductible for income tax purposes. Intangible assets other than goodwill, consist of three separately identified assets: | ■ | Shenandoah customer relationships, which are definite-lived intangible assets with an aggregate fair value of $13.2 million. The customer relationships are amortizable and will be amortized over a period of thirteen years; | | ■ | The Shenandoah tradename, which is definite-lived intangible assets with an aggregate fair value of $700,000. The trade name is amortizable and will be amortized over a period of twenty years; and | | ■ | Shenandoah’s order backlog which is a definite-lived intangible asset with an aggregate fair value of $400,000 that we amortized over four months, with all of the expense recognized in fiscal year 2018. |
The total weighted average amortization period for these assets is 12.1 years. The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to Consolidated Financial Statementsgive effect to the Shenandoah acquisition as if it had occurred on February 1, 2016: | | | Pro Forma - Unaudited | | | | | 13 Weeks Ended | | | 52 Weeks Ended | | | | | January 29, 2017 | | | January 29, 2017 | | | | | (Pro forma) | | | (Pro forma) | | Net Sales | | $ | 184,013 | | | $ | 619,569 | | Net Income | | $ | 11,702 | | | $ | 27,896 | | Basic EPS | | $ | 1.00 | | | $ | 2.38 | | Diluted EPS | | $ | 1.00 | | | $ | 2.38 | |
| | | Pro Forma - Unaudited | | | | | 13 Weeks Ended | | | 52 Weeks Ended | | | | | January 28, 2018 | | | January 28, 2018 | | | | | (Pro forma) | | | (Pro forma) | | Net Sales | | $ | 175,365 | | | $ | 649,936 | | Net Income | | $ | 8,775 | | | $ | 32,977 | | Basic EPS | | $ | 0.75 | | | $ | 2.82 | | Diluted EPS | | $ | 0.75 | | | $ | 2.81 | |
The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Shenandoah acquisition had been completed on the date indicated, nor is it indicative of our future operating results. Material adjustments, net of income tax, included in the fiscal 2017 pro forma financial information in the table above consist of the amortization of intangible assets ($171,000 in the quarterly period and $943,000 in the annual period), addition of transaction related costs ($0 in the quarterly period and $520,000 in the annual period), interest on additional debt incurred as part of the acquisition ($46,000 in the quarterly period and $197,000 in the annual period), salary expense ($46,000 in the quarterly period and $185,000 in the annual period), and income tax on Shenandoah operations ($536,000 in the quarterly period and $2.4 million in the annual period). Material adjustments, net of income tax, included in the fiscal 2018 pro forma financial information in the table above consist of the amortization of intangible assets (decrease of $132,000 in the quarterly period and a net increase of $191,000 in the annual period), reclassification of transaction related costs to fiscal 2017 (-$67,000 in the quarterly period and -$522,000 in the annual period), interest on additional debt incurred as part of the acquisition (-$13,000 in the quarterly period and $61,000 in the annual period), salaries ($0 in the quarterly period and $123,000 in the annual period), and income tax on Shenandoah operations ($0 in the quarterly period and $2.4 million in the annual period). The unaudited pro forma results do not reflect events that either have occurred or may occur in the future. They also do not give effect to certain charges that we expect to incur in connection with the Shenandoah acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization. We incurred approximately $800,000 in Shenandoah acquisition-related costs in fiscal 2018. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income. Included in our fiscal 2018 results are Shenandoah’s October 2017 through January 2018 results, which include $11.3 million in net sales and $604,000 of operating income, including $750,000 in intangible amortization expense. HMI Acquisition
On February 1, 2016, (the “Closing Date”) we completed the previously announced acquisition (the “acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“HMI”) pursuant to the Asset Purchase Agreement into which we and HMI entered on January 5, 2016 (the “Asset Purchase Agreement”). Upon completion and including post-closing working capital adjustments, we paid $86 million in cash and issued 716,910 shares of our common stock (the “Stock Consideration”) to designees of HMI as consideration for the acquisition. The Stock Consideration consisted of (i) 530,598 shares due to the $15 million of consideration payable in shares of our common stock under the Asset Purchase Agreement, and (ii) 186,312 shares issued pursuant to working capital adjustments detailed in the Asset Purchase Agreement. The working capital adjustment was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of calendar 2015. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of our common stock for the fifteen trading days immediately preceding the Closing Date ($28.27). Under the Asset Purchase Agreement, we also assumed certain liabilities of HMI, including approximately $7.8 million of liabilities related to certain retirement plans. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of HMI. In accordance with FASB Accounting Standards Codification 805, Business Combinations, the acquisition was accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from HMI at their respective fair values at the date of completion of the Acquisition. Any excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill. The following table summarizes our final estimates of the fair values of the identifiable assets acquired and liabilities assumed in the acquisition as of January 29, 2017. Adjustments recorded to our preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed as of February 1, 2016 were due to (i) the continued refinement of management's estimates, (ii) changes in pre-acquisition account balances due to the timing of HMI’s final financial close and (iii) adjustments made to conform the newly acquired entity’s accounting policies to our own. These adjustments included the reclassification of accounts receivable-related reserve items from accrued expenses to accounts receivable, the write-off of deferred rent, the reduction of property and equipment and prepaid expenses for items that had been capitalized inconsistent with our capitalization policy and the recognition of accrued salaries and wages to recognize compensated absences. | | | (in thousands) | | Purchase price consideration | | | | | Cash paid for assets acquired, including working capital adjustment | | $ | 86,062 | | Value of shares issued for assets acquired | | | 15,000 | | Value of shares issued for excess net working capital | | | 5,267 | | | | | | | | Total purchase price | | $ | 106,329 | | | | | | | | Fair value estimates of assets acquired and liabilities assumed: | | | | | Accounts receivable | | $ | 42,463 | | Inventory | | | 37,606 | | Prepaid expenses and other current assets | | | 1,801 | | Property and equipment | | | 5,292 | | Intangible assets | | | 27,800 | | Goodwill | | | 23,187 | | Accounts payable | | | (22,784 | ) | Accrued expenses | | | (316 | ) | Pension plan liabilities and deferred compensation balances | | | (8,720 | ) | | | | | | | Total purchase price | | $ | 106,329 | |
Property and equipment were recorded at fair value and primarily consist of leasehold improvements and will be amortized over their estimated useful lives. Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. We expect that all of the goodwill will be deductible for income tax purposes. Intangible assets, net, consist of three separately identified assets: | ■ | Home Meridian tradenames of $11.6 million consisting of: | | o | Indefinite-lived intangible assets with an aggregate fair value of $11.4 million. The tradenames are not subject to amortization, but will be evaluated annually and as circumstances dictate, for impairment; and | | o | Definite-lived intangible assets with an aggregate fair value of $200,000, which we expect to amortize over an eight-year period. | | ■ | Home Meridian customer relationships which are definite-lived intangible assets with an aggregate fair value of $14.4 million. The customer relationships are amortizable and will be amortized over a period of eleven years; and | | ■ | Home Meridian order backlog which is a definite-lived intangible asset with an aggregate fair value of $1.8 million which we amortized over five months, with most of the expense recognized in the fiscal 2017 first quarter. |
We also assumed the net liability for Home Meridian’s legacy pension plans of $8.7 million, which was based on an actuarial valuation performed on February 2, 2016. The market value of pension plan assets, primarily consisting of mutual funds, was $11.6 million on February 2, 2016. Components of net periodic benefit cost for these plans are based on annual actuarial valuations and are included in our condensed consolidated statements of income under selling and administrative expenses. The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the acquisition as if it had occurred on February 1, 2015: | | | 52 Weeks Ended | | (in millions except per share data) | | January 31, 2016 | | | | | (Pro forma) | | Net Sales | | $ | 571,720 | | Net Income | | | 22,831 | | Basic EPS | | | 2.12 | | Diluted EPS | | | 2.11 | |
The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the acquisition had been completed on the date indicated, nor is it indicative of our future operating results. Material non-recurring adjustments excluded from the pro forma financial information in the table above consist of amortization of intangible assets, elimination of transaction related costs and an adjustment of the interest rate on short and long-term debt to reflect the interest rates in our amended credit facility. The unaudited pro forma results do not reflect events that either have occurred or may occur in the future. They also do not give effect to certain charges that we expect to incur in connection with the acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization. We recorded acquisition related costs of $1.2 million in fiscal 2017. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income. NOTE 5 - Continued (TablesCasualty LossOn May 18, 2018, the Martinsville/Henry County, Va. area experienced torrential rains. Two of our Hooker Brands segment warehouse facilities were damaged as a result. No employees were injured and the casualty loss caused only a nominal disruption in thousands, except per share data) our ability to fulfill and ship orders. The costs associated with the recovery efforts exceeded our insurance deductible of $500,000. Consequently, we recorded a $500,000 casualty loss during the fiscal 2019 second quarter. We incurred another $409,000 of repair and remediation-related expenses during the third quarter, which was recovered from our casualty insurer during the fourth quarter of fiscal 2019.NOTE 36 – ALLOWANCE FOR DOUBTFUL ACCOUNTS
AND OTHER ACCOUNTS RECEIVABLE ALLOWANCESThe activity in the allowance for doubtful accounts was: | | | Fifty-Two | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Balance at beginning of year | | $ | 1,329 | | | $ | 1,243 | | | $ | 1,249 | | | Non-cash charges to cost and expenses | | | (105 | ) | | | 928 | | | | 456 | | | Less uncollectible receivables written off, net of recoveries | | | (192 | ) | | | (842 | ) | | | (462 | ) | | Balance at end of year | | $ | 1,032 | | | $ | 1,329 | | | $ | 1,243 | |
| | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | February 3, | | | January 28, | | | January 29, | | | | 2019 | | | 2018 | | | 2017 | | Balance at beginning of year | | $ | 1,014 | | | $ | 508 | | | $ | 396 | | Non-cash charges to cost and expenses | | | 158 | | | | 767 | | | | 823 | | Less uncollectible receivables written off, net of recoveries | | | (264 | ) | | | (261 | ) | | | (711 | ) | Balance at end of year | | $ | 908 | | | $ | 1,014 | | | $ | 508 | |
The activity in other accounts receivable allowances was: | | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | February 3, | | | January 28, | | | January 29, | | | | 2019 | | | 2018 | | | 2017 | | Balance at beginning of year | | $ | 5,117 | | | $ | 6,298 | | | $ | 636 | | Non-cash charges to cost and expenses | | | (957 | ) | | | (1,272 | ) | | | 5,586 | | Less uncollectible receivables written off, net of recoveries | | | 107 | | | | 91 | | | | 76 | | Balance at end of year | | $ | 4,267 | | | $ | 5,117 | | | $ | 6,298 | |
NOTE 47 – ACCOUNTS RECEIVABLE
| | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | | | | | | | | | Trade accounts receivable | | $ | 25,520 | | | $ | 25,322 | | | Receivable from factor | | | 3,688 | | | | 8,252 | | | Allowance for doubtful accounts | | | (1,032 | ) | | | (1,329 | ) | | Accounts receivable | | $ | 28,176 | | | $ | 32,245 | |
“Receivable from factor” represents amounts due with respect to factored accounts receivable. Before the fiscal 2016 second quarter, we factored substantially all of our domestically-produced upholstery accounts receivable without recourse to us. However, we ended Sam Moore’s factoring relationship when our ERP system became fully operational there at the beginning of the fiscal 2016 second quarter. Since that time, we have been managing Sam Moore’s accounts receivable in-house. As of November 1, 2015 there were no outstanding receivables for which payment was due to us from the factor as part of its residual obligations under Sam Moore’s legacy factoring agreement.
Under our current factoring agreement, which continues to serve Bradington-Young (BY), invoices for domestically produced BY upholstery products are generated and transmitted to our customers, with copies to the factor on a daily basis, as products are shipped to our customers. The factor collects the amounts due and remits collected funds to us semi-weekly, less factoring fees. We retain ownership of the accounts receivable until the invoices are 90 days past due. At that time, the factor pays us the net invoice amount, less factoring fees, and takes ownership of the accounts receivable. The factor is then entitled to collect the invoices on its own behalf and retain any subsequent remittances. The invoiced amounts are reported as accounts receivable on our condensed consolidated balance sheets, generally from the date the merchandise is shipped to our customer until payment is received from the factor.
A limited number of our accounts receivable for our domestically produced BY upholstery products are factored with recourse to us. The amounts of these receivables at January 31, 2016 and February 1, 2015 were $255,000 and $237,000, respectively. If the factor is unable to collect the amounts due, invoices are returned to us for collection. We include an estimate of potentially uncollectible receivables in the calculation of our allowance for doubtful accounts.
| | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | | | | | | | | | | | Trade accounts receivable | | $ | 117,732 | | | $ | 98,934 | | Other accounts receivable allowances | | | (4,267 | ) | | | (5,117 | ) | Allowance for doubtful accounts | | | (908 | ) | | | (1,014 | ) | Accounts receivable | | $ | 112,557 | | | $ | 92,803 | |
NOTE 58 – INVENTORIES | | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | Finished furniture | | $ | 55,120 | | | $ | 54,896 | | | Furniture in process | | | 727 | | | | 615 | | | Materials and supplies | | | 7,994 | | | | 9,131 | | | Inventories at FIFO | | | 63,841 | | | | 64,642 | | | Reduction to LIFO basis | | | (20,128 | ) | | | (19,669 | ) | | Inventories | | $ | 43,713 | | | $ | 44,973 | |
| | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Finished furniture | | $ | 112,847 | | | $ | 92,502 | | Furniture in process | | | 1,825 | | | | 1,440 | | Materials and supplies | | | 10,896 | | | | 8,780 | | Inventories at FIFO | | | 125,568 | | | | 102,722 | | Reduction to LIFO basis | | | (20,364 | ) | | | (18,263 | ) | Inventories | | $ | 105,204 | | | $ | 84,459 | |
If the first-in, first-out (FIFO) method had been used in valuing all inventories, net income would have been $16.5$41.5 million in fiscal 2016, $13.42019, $28.1 million in fiscal 20152018, and $8.2$24.2 million in fiscal 2014.2017. We recorded total LIFO expense of $499,000 in fiscal 2016, $1.3$2.1 million in fiscal 2015 and $493,0002019, LIFO income of $225,000 in fiscal 2014. The reduction2018 and $1.6 million in LIFO basis as of February 2, 2014 andfiscal 2017. At February 3, 2013 was $18.4 million2019 and $17.9 million, respectively. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
At January 31, 2016 and February 1, 2015,28, 2018, we had approximately $1.3 million and $1.1$3.2 million, respectively, in consigned inventories, which are included in the “Finished furniture” line in the table above.
At January 31, 2016,February 3, 2019, we held $11.0$8.1 million in inventory (approximately 6% of total assets) outside of the United States, in China and in Vietnam. At February 1, 2015,January 28, 2018, we held $10.2$10.5 million in inventory (approximately 6% of total assets) outside of the United States, in China and in Vietnam. F-21
NOTE 69 – PROPERTY, PLANT AND EQUIPMENT | | | Depreciable Lives | | | January 31, | | | February 1, | | | | | (In years) | | | 2016 | | | 2015 | | | | | | | | | | | | | | Buildings and land improvements | | 15 - 30 | | | $ | 22,777 | | | $ | 22,162 | | | Computer software and hardware | | 3 - 10 | | | | 16,137 | | | | 18,444 | | | Machinery and equipment | | 10 | | | | 4,864 | | | | 4,757 | | | Leasehold improvements | | Term of lease | | | | 2,817 | | | | 2,840 | | | Furniture and fixtures | | 3 - 8 | | | | 1,453 | | | | 2,240 | | | Other | | 5 | | | | 546 | | | | 628 | | | Total depreciable property at cost | | | | | | 48,594 | | | | 51,070 | | | Less accumulated depreciation | | | | | | 27,739 | | | | 32,790 | | | Total depreciable property, net | | | | | | 20,855 | | | | 18,280 | | | Land | | | | | | 1,067 | | | | 1,067 | | | Construction-in-progress | | | | | | 846 | | | | 3,477 | | | Property, plant and equipment, net | | | $ | 22,768 | | | $ | 22,824 | |
The decreases in computer software| | | Depreciable Lives | | | February 3, | | | January 28, | | | | | (In years) | | | 2019 | | | 2018 | | | | | | | | | | | | | | | Buildings and land improvements | | 15 - 30 | | | $ | 24,588 | | | $ | 24,298 | | Computer software and hardware | | 3 - 10 | | | | 18,719 | | | | 18,302 | | Machinery and equipment | | 10 | | | | 8,934 | | | | 8,586 | | Leasehold improvements | | Term of lease | | | | 9,376 | | | | 8,982 | | Furniture and fixtures | | 3 - 8 | | | | 2,318 | | | | 2,186 | | Other | | 5 | | | | 665 | | | | 612 | | Total depreciable property at cost | | | | 64,600 | | | | 62,966 | | Less accumulated depreciation | | | | | | 39,925 | | | | 35,100 | | Total depreciable property, net | | | | | | 24,675 | | | | 27,866 | | Land | | | | | | 1,067 | | | | 1,067 | | Construction-in-progress | | | | | | 3,740 | | | | 316 | | Property, plant and equipment, net | | | $ | 29,482 | | | $ | 29,249 | |
Depreciation expense for fiscal 2019, 2018 and hardware, furniture2017 were $5.0 million, $4.5 million and fixtures and accumulated depreciation line items above are primarily due to the write-off of fully depreciated assets that are no longer in use.
At January 31, 2016, construction-in-progress consisted of approximately $294,000 of expenditures related to our ongoing Enterprise Resource Planning (ERP) conversion efforts and approximately $552,000 related to various other projects to enhance our facilities and operations.
The decrease in the construction-in-progress line item above is primarily due to placing our ERP asset in service when the Sam Moore division went-live on our ERP platform during the fiscal 2016 second quarter. This partially offset the decreases in the computer software and hardware line item discussed above.
No significant property, plant or equipment was held outside of the United States at either January 31, 2016 or February 1, 2015.
$4.7 million, respectively.Capitalized Software Costs
Certain costs incurred in connection with developing or obtaining computer software for internal use are capitalized. These costs are amortized over periods of ten years or less. Capitalized software is reported as a component of computer software and hardware above and on the property, plant, and equipment line of our consolidated balance sheets. The activity in capitalized software costs was: | | | Fifty-Two Weeks | | | Fifty-Two Weeks | | | Fifty-Two Weeks | | | | | Ended | | | Ended | | | Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Balance beginning of year | | $ | 2,726 | | | $ | 2,550 | | | $ | 3,954 | | | Purchases | | | 4,113 | | | | 606 | | | | 173 | | | Amortization expense | | | (777 | ) | | | (430 | ) | | | (311 | ) | | Disposals | | | - | | | | - | | | | (1,266 | ) | | Balance end of year | | $ | 6,062 | | | $ | 2,726 | | | $ | 2,550 | |
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
| | | Fifty-Three Weeks | | | Fifty-Two Weeks | | | Fifty-Two Weeks | | | | | Ended | | | Ended | | | Ended | | | | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | Balance beginning of year | | $ | 5,982 | | | $ | 6,510 | | | $ | 6,062 | | Additions | | | 373 | | | | 630 | | | | 1,495 | | Amortization expense | | | (1,227 | ) | | | (1,151 | ) | | | (973 | ) | Disposals | | | (5 | ) | | | (7 | ) | | | - | | Adjustments | | | - | | | | - | | | | (74 | ) | Balance end of year | | $ | 5,123 | | | $ | 5,982 | | | $ | 6,510 | |
NOTE 710 – INTANGIBLE ASSETS | | | | | January 31, | | | February 1, | | | | | Segment | | 2016 | | | 2015 | | | Non-amortizable Intangible Assets | | | | | | | | | | Trademarks and trade names - Bradington-Young | | Upholstery | | $ | 861 | | | $ | 861 | | | Trademarks and trade names - Sam Moore | | Upholstery | | | 396 | | | | 396 | | | URL- Homeware.com | | All other | | | 125 | | | | 125 | | | Total Non-amortizable Intangible Assets | | | | | 1,382 | | | | 1,382 | |
We recorded certain intangible assets related to the acquisitions of Bradington-Young and Sam Moore and upon purchase of the Homeware.com URL. The Bradington-Young and Sam Moore AND GOODWILLOur goodwill, some trademarks and trade names have indefinite useful lives and, consequently, are not subject to amortization for financial reporting purposes but are tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. See “Note 1 – Summary Our non-amortizable intangible assets consist of: | ■ | Goodwill and trademarks and tradenames related to the Home Meridian and Shenandoah acquisitions; and |
| ■ | Trademarks and tradenames related to the acquisitions of Bradington-Young (acquired in 2002), Sam Moore (acquired in 2007) and Home Meridian (acquired in 2016). |
We review goodwill annually for impairment or more frequently if events or circumstances indicate that it might be impaired. F-22
TrademarksIn accordance with ASU 2017-04, Intangibles—Goodwill and trade namesOther (Topic 350): Simplifying the Test for Goodwill Impairment, the goodwill impairment test consists of a two-step process, if necessary. However, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the goodwill impairment test outlined in ASC Topic 350. The more likely than not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary and our goodwill is considered to be unimpaired. However, if based on our qualitative assessment we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we will proceed with performing the quantitative assessment. The quantitative assessment involves estimating the fair value of our goodwill using projected future cash flows that are relateddiscounted using a weighted average cost of capital analysis that reflects current market conditions. Management judgment is a significant factor in the goodwill impairment evaluation process. The computations require management to make estimates and assumptions, the acquisitionsmost critical of Bradington-Youngwhich are the potential future cash flows and Sam Moore. an appropriate discount rate. Based on our qualitative assessment as described above, we have concluded that our goodwill is not impaired as of February 3, 2019. In conjunction with our evaluation of the cash flows generated by the Home Meridian, Bradington-Young and Sam Moore reporting units, we evaluated the carrying value of trademarks and trade names using the relief from royalty method, which values the trademark/trade name by estimating the savings achieved by ownership of the trademark/trade name when compared to licensing the mark/name from an independent owner. The inputs used in the trademark/trade name analyses are considered Level 3 fair value measurements. At January 31, 2016, the fair valueDetails of our Bradington-Young trade name exceeded itsnon-amortizable intangible assets are as follows: | | | | Segment | | February 3, | | | January 28, | | Non-amortizable Intangible Assets | | | | 2019 | | | 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 | |
The following table is a rollforward of goodwill for the 2019, 2018 and 2017 fiscal years: Segment | | January 29, 2017 | | | Acquisition | | | January 28, 2018 | | | Acquisition | | | February 3, 2019 | | | | | | | | | | | | | | | | | | | | | | | | Home Meridian | | $ | 23,187 | | | $ | - | | | $ | 23,187 | | | $ | - | | | $ | 23,187 | | All Other | | | - | | | | 16,871 | | | | 16,871 | | | | - | | | | 16,871 | | | | | $ | 23,187 | | | $ | 16,871 | | | $ | 40,058 | | | $ | - | | | $ | 40,058 | |
Our amortizable intangible assets are recorded in the Home Meridian and in All Other. The carrying value by approximately $1.4 million,amounts and the fair valuechanges 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 | | | (2,324 | ) | | | (60 | ) | | | (2,384 | ) | Balance at February 3, 2019 | | $ | 22,320 | | | $ | 778 | | | $ | 23,098 | |
The weighted-average amortization period for all amortizable intangible assets is 10.2 years. The weighted-average amortization period for customer relationships is 9.9 years and is 16.5 years for our Sam Moore trade name was approximately $637,000 in excesstrademarks. F-23
The estimated amortization expense associated with our amortizable intangible assets is expected to be as follows: Fiscal Year | | Amount | | | | | | | | 2020 | | | 2,384 | | 2021 | | | 2,384 | | 2022 | | | 2,384 | | 2023 | | | 2,384 | | 2024 | | | 2,384 | | 2025 and thereafter | | | 11,178 | | | | | $ | 23,098 | |
Gross intangible assets and total accumulated amortization for each major class of intangible assets is as follows: | | | February 3, 2019 | | | January 28, 2018 | | | | | | | | | | | | Goodwill | | $ | 40,058 | | | $ | 40,058 | | | | | | | | | | | | Trademarks and tradenames | | | 13,495 | | | | 13,557 | | Accumulated amortization | | | (60 | ) | | | (62 | ) | Trademarks and tradenames, net | | | 13,435 | | | | 13,495 | | | | | | | | | | | | Customer relationships | | | 24,644 | | | | 27,600 | | Accumulated amortization | | | (2,324 | ) | | | (2,956 | ) | Customer relationships, net | | | 22,320 | | | | 24,644 | | | | | | | | | | | | | | | | | | | | | | Total Goodwill and other intangible assets, net | | $ | 75,813 | | | $ | 78,197 | |
NOTE 811 – FAIR VALUE MEASUREMENTS
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of February 3, 2019 and January 31, 2016 and February 1, 2015,28, 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. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
As of January 31, 2016, a mortgage note receivable, secured by a lien onFebruary 3, 2019, the property, wasassets of the Home Meridian segment’s legacy Pension Plan (the “Plan”) were measured at fair value on a non-recurringrecurring basis usingbased on Level 31 inputs. The note receivable was delivered to usPension plan assets, held in a trust account by the buyer as partPlan’s trustee, primarily consist of bond funds. During the fiscal 2019 third quarter, we transferred $3 million to the Pension Plan to reduce the underfunded balance and engaged in a “de-risking” strategy by moving Plan assets into fixed income securities, in order to reduce the volatility of the purchase pricePlan Assets. As of February 3, 2019, the funded status for our Cloverleaf facility during the fiscal 2015 first quarter andthis plan was recorded at approximately $1.6 million, the original face value of the note. The carrying value of the note is assumed to approximate its fair value. We measure the probability that amounts due to us under this note will be collected primarily based$86,000 shown on the buyer’s payment history. Specifically, we consider the buyer’s adherence to the contractual payment terms for both timeliness and payment amounts. Should it become probable that we would be unable to collect all amounts due according to the contractual terms of the note, we would measure the note for impairment and record a valuation allowance against the note, if needed, with the related expense charged to income for that period. The current portion of the note receivable is included in the prepaid expenses and other current assets“Other assets” line of our condensed consolidated balance sheets. The non-current portion is included inSee Note 13. Employee Benefit Plans for additional information about the “Other Assets” linePlan. Our assets measured at fair value on a recurring and non-recurring basis at February 3, 2019 and January 31, 2016 and February 1, 2015,28, 2018, were as follows: | | | Fair value at January 31, 2016 | | | Fair value at February 1, 2015 | | | 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 | | $ | - | | | $ | 21,888 | | | $ | | | | $ | 21,888 | | | $ | - | | | $ | 20,373 | | | $ | - | | | $ | 20,373 | | | Mortgage note receivable | | | - | | | | | | | | 1,575 | | | | 1,575 | | | | - | | | | - | | | | 1,575 | | | | 1,575 | |
| | | Fair value at February 3, 2019 | | | Fair value at January 28, 2018 | | Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | | | (In thousands) | | | | | | | | | | | | | | Assets measured at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Company-owned life insurance | | $ | - | | | $ | 23,816 | | | $ | - | | | $ | 23,816 | | | $ | - | | | $ | 23,622 | | | $ | - | | | $ | 23,622 | | Pension plan assets | | | 10,992 | | | | - | | | | - | | | | 10,992 | | | | 8,757 | | | | - | | | | - | | | | 8,757 | |
NOTE 912 – LONG-TERM DEBT
Subsequent
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 endHome Meridian acquisition. A second unsecured term loan, used to partially fund the Shenandoah acquisition, was paid off during fiscal 2019. Details of our loan agreements and revolving credit facility are detailed below. Original Loan Agreement On February 1, 2016, fiscal year, we completed the acquisition of substantially all of the assets of Home Meridian International, Inc. and entered into an amended and restated loan agreement with Bank of America. See Item 7 and note 18 to our consolidated financial statements for additional information.
Our 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 of January 31, 2016, which was scheduled to expire on July 31, 2018, included the following terms: follows: | §■ | A $15.0Unsecured revolving credit facility. The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; |
| ■ | Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and |
| ■ | Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amounts borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement. |
New Loan Agreement On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement: | ■ | amended and restated the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility up to $3.0(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 of which could have been used to support letters of credit; |
| § | A floatingunsecured term loan (the “New Unsecured Term Loan”). Amounts outstanding under the New Unsecured Term Loan will bear interest at a rate, adjusted monthly, basedequal to the then current LIBOR monthly rate plus 1.50%. We must repay the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 or the expiration of the Existing Revolver, at which time all amounts outstanding under the New Unsecured Term Loan will become due and payable. We may prepay the outstanding principal amount under the New Unsecured Term Loan, in full or in part, on USD LIBOR, plus an applicable margin based onany interest payment date without penalty. On September 29, 2017, we borrowed the ratio of our funded debtfull $12 million available under the New Unsecured Term Loan to our EBITDA (each as definedpartially fund the cash consideration used in the agreement);Shenandoah acquisition. |
| § | A quarterly unused commitment fee of 0.20%; and |
The Company could have permanently terminated or reduced the $15 million revolving commitment under the loan agreement without penalty. The loan agreementNew Loan Agreement also included customary representations and warranties and requiredrequires us to comply with customary covenants, including, among other things, the following financial covenants: | §● | Maintain a tangible net worthratio of funded debt to EBITDA not exceeding: |
| o | 2.25:1.0 through August 31, 2019; and |
| ● | A basic fixed charge coverage ratio of at least $95.0 million;1.25:1.00; and |
| §● | Limit capital expenditures to no more than $15.0 million during any fiscal year; andyear beginning in fiscal 2020. |
| § | Maintain a ratio of funded debt to EBITDA not exceeding 2.0:1.0. |
The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement. We were in compliance with each of these financial covenants at January 31, 2016February 3, 2019. Principal payments due on our term loans are as follows: Fiscal Year | | Amount | | | | | | | | 2020 | | | 5,857 | | 2021 | | | 29,651 | | | | | $ | 35,508 | |
Given that our term loans have a floating rate of interest and asour credit profile has not materially changed since the inception of that date, expect to remain in compliance with existing covenants throughthe loans, the carrying amount of our term loans approximates their fair value at February 3, 2019. During fiscal 2017 and for2019, we paid off the foreseeable future. The loan agreement did not restrict our ability to pay cash dividends on, or repurchase our common shares, subject to complying with the financial covenantsremaining amounts due under the agreement.
New Unsecured Term Loan.As of January 31, 2016,February 3, 2019, we had an aggregate $13.3$27.7 million available under our revolving credit facilitythe Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $1.7$2.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of January 31, 2016.February 3, 2019. There were no additional borrowings outstanding under the revolving credit facility on January 31, 2016. Existing Revolver as of February 3, 2019.
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
NOTE 1013 – EMPLOYEE BENEFIT PLANS
We sponsor a tax-qualified 401(k) retirement plan covering substantially all employees. This plan assists employees in meeting their savings and retirement planning goals through employee salary deferrals and discretionary employer matching contributions. Our contributions to the plan amounted to $666,000$1.3 million in fiscal 2016, $605,0002019, $974,000 in fiscal 2015,2018, and $593,000$977,000 in fiscal 2014. 2017.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 $30,000 gain and $581,000 expense from Selling and administrative expenses to Other income, net in our fiscal 2018 and 2017 condensed consolidated statements of income. Executive Benefits
Pension, SRIP and SERP Overview We provide supplemental executivemaintain three “frozen” retirement plans, which are paying benefits and may include active employees among the participants but we do not expect to certain management employees under a supplemental retirement income plan (“SRIP”). add participants to these plans in the future. The three plans include: | ■ | a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation; | | ■ | the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives; and | | ■ | the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees. |
SRIP and SERP The SRIP provides monthly payments to participants or their designated beneficiaries based on a participant’s “final average monthly earnings” and “specified percentage” participation level as defined in the plan, subject to a vesting schedule that may vary for each participant. The benefit is payable for a 15-year period following the participant’s termination of employment due to retirement, disability or death. In addition, the monthly retirement benefit for each participant, regardless of age, becomes fully vested and the present value of that benefit is paid to each participant in a lump sum upon a change in control of the Company as defined in the plan. The SRIP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the vested benefits to which participating employees are currently entitled, but based on the employees’ expected dates of separation or retirement. No employees have been added to the plan since 2008 and we do not expect to add additional employees in the future, due to changes in our compensation philosophy, which emphasizes more performance-based compensation measures in total management compensation. The SERP provides monthly payments to eight retirees or their designated beneficiaries based on a defined benefit formula as defined in the plan. The benefit is payable for the life of the retiree with the following forms available as a reduced monthly benefit: Ten-year Certain and Life; 50% or 100% Joint and Survivor Annuity. The SERP is unfunded and all benefits are payable solely from our general assets. The plan liability is based on the aggregate actuarial present value of the benefits to which retired employees are currently entitled. No employees have been added to the plan since 2006 and we do not expect to add additional employees in the future. F-27
Summarized planSRIP and SERP information as of each fiscal year-end (the measurement date) is as follows: | | | SRIP (Supplemental Retirement Income Plan) | | SERP (Supplemental Executive Retirement Plan) | | | | | Fifty-Three | | | Fifty-Two | | | | Fifty-Three | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | | | | | | | | | | | | Beginning projected benefit obligation | | $ | 9,365 | | | $ | 8,845 | | | | $ | 2,008 | | | $ | 2,302 | | Service cost | | | 326 | | | | 302 | | | | | | | | | | | Interest cost | | | 341 | | | | 345 | | | | | 70 | | | | 83 | | Benefits paid | | | (511 | ) | | | (520 | ) | | | | (185 | ) | | | (216 | ) | Actuarial loss (gain) | | | 101 | | | | 393 | | | | | (88 | ) | | | (160 | ) | Ending projected benefit obligation (funded status) | | $ | 9,622 | | | $ | 9,365 | | | | $ | 1,805 | | | $ | 2,008 | | | | | | | | | | | | | | | | | | | | | Accumulated benefit obligation | | $ | 9,182 | | | $ | 8,727 | | | | $ | 1,805 | | | $ | 2,008 | | | | | | | | | | | | | | | | | | | | | Discount rate used to value the ending benefit obligations: | | | 3.75 | % | | | 3.75 | % | | | | 3.90 | % | | | 3.64 | % | | | | | | | | | | | | | | | | | | | | Amount recognized in the consolidated balance sheets: | | | | | | | | | | | | | | | | | | Current liabilities (Accrued salaries, wages and benefits line) | | $ | 511 | | | $ | 511 | | | | $ | 173 | | | $ | 188 | | Non-current liabilities (Deferred compensation line*) | | | 9,111 | | | | 8,854 | | | | | 1,632 | | | | 1,820 | | Total | | $ | 9,622 | | | $ | 9,365 | | | | $ | 1,805 | | | $ | 2,008 | |
| | | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | Fifty-Three | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | January 29, | | | 3-Feb | | | January 28, | | | | | 2019 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | | Net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | Service cost | | $ | 326 | | | $ | 302 | | | $ | 375 | | | $ | - | | | $ | - | | Interest cost | | | 341 | | | | 345 | | | | 341 | | | | 70 | | | | 83 | | Net loss (gain) | | | 172 | | | | 62 | | | | (72 | ) | | | - | | | | - | | Net periodic benefit cost | | $ | 839 | | | $ | 709 | | | $ | 644 | | | $ | 70 | | | $ | 83 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other changes recognized in accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | Net loss (gain) arising during period | | | 101 | | | | 393 | | | | 330 | | | | (88 | ) | | | (160 | ) | Amortizations: | | | | | | | | | | | | | | | | | | | | | Gain (Loss) | | | (172 | ) | | | (62 | ) | | | 72 | | | | - | | | | - | | Total recognized in other comprehensive loss (income) | | | (71 | ) | | | 331 | | | | 402 | | | | (88 | ) | | | (160 | ) | | | | | | | | | | | | | | | | | | | | | | | Total recognized in net periodic benefit cost and accumulated other comprehensive income | | $ | 768 | | | $ | 1,040 | | | $ | 1,046 | | | $ | (18 | ) | | $ | (77 | ) | | | | | | | | | | | | | | | | | | | | | | | Assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | Discount rate | | | 3.75 | % | | | 4.00 | % | | | 4.3 | % | | | 3.64 | % | | | 3.77 | % | Increase in future compensation levels | | | 4.00 | % | | | 4.00 | % | | | 4.0 | % | | | N/A | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Future Benefit Payments: | | | | | | | | | | | | | | | | | | | | | Fiscal 2020 | | $ | 511 | | | | | | | | | | | $ | 173 | | | | | | Fiscal 2021 | | | 873 | | | | | | | | | | | | 169 | | | | | | Fiscal 2022 | | | 873 | | | | | | | | | | | | 165 | | | | | | Fiscal 2023 | | | 873 | | | | | | | | | | | | 160 | | | | | | Fiscal 2024 | | | 960 | | | | | | | | | | | | 155 | | | | | | Fiscal 2025 through fiscal 2029 | | | 4,340 | | | | | | | | | | | | 683 | | | | | |
F-28
| | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | Change in benefit obligation: | | | | | | | | Beginning projected benefit obligation | | $ | 8,385 | | | $ | 7,662 | | | Service cost | | | 406 | | | | 102 | | | Interest cost | | | 289 | | | | 339 | | | Benefits paid | | | (354 | ) | | | (354 | ) | | Actuarial (gain) loss | | | (573 | ) | | | 636 | | | Ending projected benefit obligation (funded status) | | $ | 8,153 | | | $ | 8,385 | | | | | | | | | | | | | Accumulated benefit obligation | | $ | 7,446 | | | $ | 7,373 | | | | | | | | | | | | | Discount rate used to value the ending benefit obligations: | | | 4.25 | % | | | 3.5 | % | | | | | | | | | | | | Amount recognized in the consolidated balance sheets: | | | | | | | | | | Current liabilities (Accrued salaries, wages and benefits line) | | $ | 354 | | | $ | 354 | | | Non-current liabilities (Deferred compensation line*) | | | 7,799 | | | | 8,031 | | | Total | | $ | 8,153 | | | $ | 8,385 | | | | | | | | | | | |
NotesFor the SRIP, the discount rate used to Consolidated Financial Statements - Continued(Tablesdetermine the fiscal 2019 net periodic cost was 3.75% based on the Moody’s Composite Bond Rate as of January 31, 2018. The net periodic benefit cost recognized in thousands, except per share data)
*Total Deferred Compensation in the Long-Term Liabilities section of our Consolidated Balance Sheets is $8.4 millionother comprehensive income was due to a decreased discount rate from 4.25% at January 31, 2016 and $8.3 million29, 2017 to 4.00% at February 1, 2015. These totals include the SRIP amounts shown in the table above,January 28, 2018 as well as additional long-term compensation-related items unrelated to our SRIP.
| | | Fifty-Two | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Net periodic benefit cost | | | | | | | | | | | | | | Service cost | | $ | 406 | | | $ | 102 | | | $ | 256 | | | Interest cost | | | 289 | | | | 339 | | | | 292 | | | Net loss (gain) | | | 178 | | | | (51 | ) | | | (106 | ) | | Net periodic benefit cost | | $ | 873 | | | $ | 390 | | | $ | 442 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Other changes recognized in accumulated other comprehensive income | | | | | | | | | | | | | | Net (gain) loss arising during period | | | (574 | ) | | | 636 | | | | 57 | | | (Loss) gain | | | (178 | ) | | | 51 | | | | 106 | | | Total recognized in other comprehensive (income) loss | | | (752 | ) | | | 687 | | | | 163 | | | | | | | | | | | | | | | | Total recognized in net periodic benefit cost and accumulated other comprehensive income | | $ | 121 | | | $ | 1,077 | | | $ | 605 | | | | | | | | | | | | | | | | | Assumptions used to determine net periodic benefit cost: | | | | | | | | | | | | | | Discount rate (Moody's Composite Bond Rate) | | | 3.5 | % | | | 4.5 | % | | | 4.0 | % | | Increase in future compensation levels | | | 4.0 | % | | | 4.0 | % | | | 4.0 | % |
| Estimated Future Benefit Payments: | | | | | | Fiscal 2017 | | $ | 354 | | | Fiscal 2018 | | | 530 | | | Fiscal 2019 | | | 530 | | | Fiscal 2020 | | | 795 | | | Fiscal 2021 | | | 795 | | | Fiscal 2022 through Fiscal 2026 | | | 4,376 | |
The decrease in the net loss recognized in other accumulated comprehensive income was primarily due to an increase in the discount rate from 3.5% at February 1, 2015 to 4.25% at January 31, 2016.projected bonus for executives. The discount rate utilized in each period was the Annualized Moody’s Composite Bond Rate rounded to the nearest 0.25%.
For the SERP, the discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by our actuary, Aon Hewitt (“Aon”). This yield curve was constructed from the underlying bond price and yield data collected as of the Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate. Increasing the SRIP discount rate by 1% would decrease the projected benefit obligation at January 31, 2016February 3, 2019 by approximately $610,000.$640,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at January 31, 2016February 3, 2019 by $688,000.
At January 31, 2016,$715,000. Increasing the actuarial gains related to this plan amounted to $139,000, net of tax of ($79,000)SERP discount rate by 1% would decrease the projected benefit obligation at February 3, 2019 by approximately $124,000. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 3, 2019 by $141,000.At February 1, 2015,3, 2019, the actuarial losses related to this planthe SRIP amounted to ($335,000),$101,000, net of tax of $198,000.$23,000. At January 28, 2018, the actuarial losses related to the SRIP amounted to $393,000, net of tax of $62,000. The estimated prior service (cost) credit and actuarial gain (loss)loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 20172020 are $0 and $73,000,$149,000, respectively. At February 3, 2019, the actuarial gain related to the SERP was $88,000. The estimated net transition (asset)/obligation, prior service (cost) credit and actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over fiscal 2020 are immaterial. The Pension Plan No benefits have accrued under the Pension Plan since it was frozen in March 1995. We contributed $110,000 in required contributions to the Pension Plan in the fiscal 2019 first quarter. During the fiscal 2019 third quarter, we transferred $3 million to the Pension Plan to reduce the underfunded balance and engaged in a “de-risking” strategy by moving Plan assets into fixed income securities, in order to reduce the volatility of the Plan Assets. On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. Pension Plan termination is an eighteen to twenty-four-month process, that involves seeking certain approvals from both the IRS and PBGC. Once we receive the appropriate approvals, an insurance company will be selected to provide annuities for participants at an amount equal to their current monthly pension benefit. Upon settlement of the pension liability, we will reclassify the related pension losses currently recorded in accumulated other comprehensive loss, to the consolidated statements of operations. We expect to record pension settlement expenses against earnings which could adversely affect our earnings. Additionally, there could be excess costs to terminate the plan. As of February 3, 2019, current Pension Plan assets are invested in bond funds and are measured at fair value using Level 1 inputs, which are quoted prices in active markets. The Pension Plan discount rate assumption used to measure the postretirement benefit obligations is set by reference to a certain hypothetical AA-rated corporate bond spot-rate yield curve constructed by Aon. This yield curve was constructed from the underlying bond price and yield data collected as of the Pension Plan’s measurement date and is represented by a series of annualized, individual discount rates with durations ranging from six months to seventy-five years. Aon then applies the yield curve to the actuarially projected cash flow patterns to derive the appropriate discount rate. The vested benefit obligation for the Pension Plan is the actuarial present value of the vested benefits to which the employee is currently entitled, but based on the employee’s expected date of separation or retirement. Increasing the Pension Plan discount rate by 1% would decrease the projected benefit obligation at February 3, 2019 by approximately $1.1 million. Similarly, decreasing the discount rate by 1% would increase the projected benefit obligation at February 3, 2019 by $1.3 million. The expected long-term rate of return on Pension Plan assets (“EROA”) is 3.8% as ofthe Plan’s most recent valuation date of February 3, 2019. We select the EROA to use based on input from Aon, our Pension Plan Investment Consultant and Actuary. Aon provides us with a statistical analysis of future expected returns based on the current investment policy target asset mix and Aon’s capital market assumptions. We then select the return from Aon’s reasonable range recommendation. Summarized Pension Plan information as of February 3, 2019 (the measurement date) is as follows: Pulaski Furniture Pension Plan | | | Fifty-Three | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Change in benefit obligation: | | | | | | | | | Beginning projected benefit obligation | | $ | 11,198 | | | $ | 17,380 | | Acquisition | | | | | | | | | Service cost | | | - | | | | - | | Interest cost | | | 415 | | | | 695 | | Benefits paid | | | (708 | ) | | | (1,187 | ) | Settlement | | | - | | | | (5,923 | ) | Actuarial loss | | | 1 | | | | 233 | | Ending projected benefit obligation | | $ | 10,906 | | | $ | 11,198 | | | | | | | | | | | | Change in Plan Assets: | | | | | | | | | Beginning fair value of plan assets | | $ | 8,757 | | | $ | 13,881 | | Actual return on plan assets | | | 23 | | | | 2,325 | | Employer contributions | | | 3,110 | | | | 511 | | Actual expenses paid | | | (190 | ) | | | (371 | ) | Settlement | | | - | | | | (6,402 | ) | Actual benefits paid | | | (708 | ) | | | (1,187 | ) | Ending fair value of plan assets | | $ | 10,992 | | | $ | 8,757 | | | | | | | | | | | | Funded Status of the Plan | | $ | 86 | | | $ | (2,441 | ) | | | | | | | | | | | Discount rate used to value the ending benefit obligations: | | | 3.80 | % | | | 3.82 | % | | | | | | | | | | | Amount recognized in the consolidated balance sheets: | | | | | | | | | Current liabilities (Accrued salaries, wages and benefits line) | | $ | 86 | | | $ | - | | Non-current liabilities (Deferred compensation line*) | | | - | | | | (2,441 | ) | Net Asset/(Liability) | | $ | 86 | | | $ | (2,441 | ) | | | | | | | | | | |
| | | Fifty-Three | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Net periodic benefit cost | | | | | | | | | Expected administrative expenses | | $ | 280 | | | $ | 280 | | Interest cost | | | 415 | | | | 695 | | Net loss (gain) | | | (575 | ) | | | (933 | ) | Net periodic benefit cost | | $ | 120 | | | $ | 42 | | Settlement/Curtailment expense (Income) | | | | | | | (562 | ) | Total net periodic benefit cost (Income) | | $ | 120 | | | $ | (520 | ) | | | | | | | | | | | Other changes recognized in other comprehensive income | | | | | | | | | Net (gain) loss arising during period | | | 464 | | | | (590 | ) | Amortization: | | | | | | | | | (Loss) gain | | | - | | | | 562 | | Total recognized in other comprehensive (income) loss | | | 464 | | | | (28 | ) | | | | | | | | | | | Total recognized in net periodic benefit cost and accumulated other comprehensive income | | $ | 584 | | | $ | (548 | ) | | | | | | | | | | | Assumptions used to determine net periodic benefit cost: | | | | | | | | | Discount rate | | | 3.82 | % | | | 4.14 | % | Increase in future compensation levels | | | N/A | | | | N/A | |
Estimated Future Benefit Payments: | | | | | | | | | Fiscal 2020 | | $ | 681 | | | | | | Fiscal 2021 | | | 681 | | | | | | Fiscal 2022 | | | 683 | | | | | | Fiscal 2023 | | | 674 | | | | | | Fiscal 2024 | | | 693 | | | | | | Fiscal 2025 through Fiscal 2029 | | | 3,461 | | | | | |
Life Insurance We also provide a life insurance program for certain executives. The life insurance program provides death benefit protection for these executives during employment up to age 65. Coverage under the program declines when a participating executive attains age 60 and automatically terminates when the executive attains age 65 or terminates employment with us for any reason, other than death, whichever occurs first. The life insurance policies funding this program are owned by the Company with a specified portion of the death benefits payable under those policies endorsed to the insured executives’ designated beneficiaries. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
The Compensation Committee of our Board of Directors annually awards performance grants to certain senior executives under the Company’s Stock Incentive Plan. Payments under these awards are based on our achieving specified performance targets during a designated performance period. Generally, each executive must remain continuously employed with the Company through the end of the performance period. Typically, performance grants can be paid in cash, shares of the Company’s common stock, or both, at the discretion of the Compensation Committee at the time payment is made.
Outstanding performance grants are classified as liabilities since the (i) settlement amount for each grant is not known until after the applicable performance period is completed and (ii) settlement of the grants may be made in common stock, cash or a combination of both. The estimated cost of each grant is recorded as compensation expense over its performance period when it becomes probable that the applicable performance targets will be achieved. The expected cost of the performance grants is revalued each reporting period. As assumptions change regarding the expected achievement of performance targets, a cumulative adjustment is recorded and future compensation expense will increase or decrease based on the currently projected performance levels. If we determine that it is not probable that the minimum performance thresholds for outstanding performance grants will be met, no further compensation cost will be recognized and any previously recognized compensation cost will be reversed. During fiscal 2013,2016, the Compensation Committee awarded performance grants for the 20142017 fiscal year. The 20142016 awards had a three-year performance period that ended on January 15, 2016.29, 2017. The performance criteria for these awards were met and were paid in April 2016.2017. During fiscal 20152017, fiscal 2018 and fiscal 2016,2019, the Compensation Committee awarded performance grants for the 2015 and 2016 fiscal years that have three-year performance periods ending on January 29, 201728, 2018, February 3, 2019 and January 28, 2018.February 2, 2020, respectively. The following amounts were accrued in our consolidated balance sheets as of the fiscal period-end dates indicated: | | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | Performance grants | | | | | | | | Fiscal 2013 grant (Current liabilities, Accrued wages, salaries and benefits) | | $ | - | | | $ | 689 | | | Fiscal 2014 grant (Current liabilities, Accrued wages, salaries and benefits) | | | 619 | | | | 195 | | | Fiscal 2015 grant (Non-current liabilities, Deferred compensation) | | | 429 | | | | 86 | | | Fiscal 2016 grant (Non-current liabilities, Deferred compensation) | | | 129 | | | | - | | | Total performance grants accrued | | $ | 1,177 | | | $ | 970 | |
| | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Performance grants | | | | | | | | | Fiscal 2016 grant (Current liabilities, Accrued wages, salaries and benefits) | | $ | - | | | $ | 193 | | Fiscal 2017 grant (Current liabilities, Accrued wages, salaries and benefits) | | | 621 | | | | 186 | | Fiscal 2018 grant (Non-current liabilities, Deferred compensation) | | | 468 | | | | 274 | | Fiscal 2019 grant (Non-current liabilities, Deferred compensation) | | | 268 | | | | - | | Total performance grants accrued | | $ | 1,357 | | | $ | 653 | |
NOTE 1114 – SHARE-BASED COMPENSATION
Our Stock Incentive Plan permits incentive awards of restricted stock, restricted stock units, stock appreciation rights and performance grants to key employees. A maximum of 750,000 shares of the Company’s common stock is authorized for issuance under the Stock Incentive Plan. The Stock Incentive Plan also provides for annual restricted stock awards to non-employee directors. We have issued restricted stock awards to our non-employee directors since January 2006 and certain other management employees since 2014.
We account for restricted stock awards as “non-vested equity shares” until the awards vest or are forfeited. Restricted stock awards to non-employee directors and certain other management employees vest if the director/employee remains on the board/employed through a 36-month servicethe specified vesting period for shares and may vest earlier upon certain events specified in the plan. For shares issued to non-employee directors during fiscal 2016 and after, there is a 12-month service period. The fair value of each share of restricted stock is the market price of our common shares on the grant date. The weighted average grant-date fair values of restricted stock awards issued during fiscal 2019 were $37.83 and $46.88, respectively, during fiscal 2018 were $31.45, $41.70 and $39.05, during fiscal year 20162017 were $25.72, $26.09$25.45 and $21.44, during 2015 were $15.96 and $13.86 per share, and in 2014 and 2013 was $15.96 and $10.38 per share,$24.17, respectively. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
The restricted stock awards outstanding as of January 31, 2016February 3, 2019 had an aggregate grant-date fair value of $476,000,$830,000, after taking vested and forfeited restricted shares into account. As of January 31, 2016,February 3, 2019, we have recognized non-cash compensation expense of approximately $274,000$476,000 related to these non-vested awards and $626,000$1.4 million for awards that have vested. The remaining $202,000$354,000 of grant-date fair value for unvested restricted stock awards outstanding at January 31, 2016February 3, 2019 will be recognized over the remaining vesting periods for these awards. F-32
For each restricted stock issuance, the following table summarizes restricted stock activity, including the weighted average issue price of those shares on the grant date, the fair value of each grant of restricted stock on the grant date, compensation expense recognized for the unvested shares of restricted stock for each grant and the remaining fair value of the unvested shares of restricted stock for each grant as of January 31, 2016:
| | | Whole | | | Grant-Date | | | Aggregate | | | Compensation | | | Grant-Date Fair Value | | | | | Number of | | | Fair Value | | | Grant-Date | | | Expense | | | Unrecognized At | | | | | Shares | | | Per Share | | | Fair Value | | | Recognized | | | January 31, 2016 | | | Previous Awards (vested) | | | | | | | | | | | $ | 626 | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on June 7, 2013 | | | 6,876 | | | $ | 15.96 | | | | 110 | | | | 80 | | | | 10 | | | Forfeited | | | (1,269 | ) | | $ | 15.96 | | | | (20 | ) | | | - | | | | - | | | Balance | | | 5,607 | | | | | | | | 90 | | | | 80 | | | | 10 | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on June 4, 2014 | | | 1,624 | | | $ | 13.86 | | | | 23 | | | | 13 | | | | 10 | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on June 10, 2014 | | | 8,385 | | | $ | 15.96 | | | | 133 | | | | 61 | | | | 49 | | | Forfeited | | | (1,434 | ) | | $ | 15.96 | | | | (23 | ) | | | - | | | | - | | | Balance | | | 6,951 | | | | | | | | 110 | | | | 61 | | | | 49 | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on April 6, 2015 | | | 5,741 | | | $ | 21.44 | | | | 123 | | | | 34 | | | | 89 | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on June 9, 2015 | | | 4,302 | | | $ | 26.09 | | | | 112 | | | | 75 | | | | 37 | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on July 21, 2015 | | | 694 | | | $ | 25.72 | | | | 18 | | | | 11 | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | | | Awards outstanding at January 31, 2016: | | | 24,919 | | | | | | | $ | 476 | | | $ | 274 | | | $ | 202 | |
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
February 3, 2019:| | | Whole | | | Grant-Date | | | Aggregate | | | Compensation | | | Grant-Date Fair Value | | | | | Number of | | | Fair Value | | | Grant-Date | | | Expense | | | Unrecognized At | | | | | Shares | | | Per Share | | | Fair Value | | | Recognized | | | February 3, 2019 | | Previous Awards (vested) | | | | | | | | | | | | | | $ | 1,425 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on April 13, 2016 | | | 4,872 | | | $ | 25.45 | | | $ | 129 | | | | 93 | | | $ | 5 | | Forfeited | | | (1,175 | ) | | | | | | | (31 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on April 13, 2017 | | | 4,572 | | | $ | 31.45 | | | | 142 | | | | 66 | | | | 42 | | Forfeited | | | (1,058 | ) | | | | | | | (34 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on May 7, 2018 | | | 7,972 | | | $ | 37.83 | | | | 301 | | | | 75 | | | | 226 | | | | | | | | | | | | | | | | | | | | | | | | Restricted shares Issued on June 8, 2018 | | | 6,887 | | | $ | 46.88 | | | | 323 | | | | 242 | | | | 81 | | | | | | | | | | | | | | | | | | | | | | | | Awards outstanding at February 3, 2019: | | | 22,070 | | | | | | | $ | 830 | | | $ | 476 | | | $ | 354 | |
We have awarded time-based restricted stock units to certain senior executives since 2011. Each restricted stock unit, or “RSU”, entitles the executive to receive one share of the Company’s common stock if he remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of the Company’s common stock, cash or both, at the discretion of the Compensation Committee. The RSUs are accounted for as “non-vested stock grants.” Similar to the restricted stock grants issued to our non-employee directors, RSU compensation expense is recognized ratably over the applicable service period. However, unlike restricted stock grants, no shares are issued, or other payment made, until the end of the applicable service period (commonly referred to as “cliff vesting”) and grantees are not entitled to receive dividends on their RSUs during that time. The fair value of each RSU is the market price of a share of our common stock on the grant date, reduced by the present value of the dividends expected to be paid on a share of our common stock during the applicable service period, discounted at the appropriate risk-free rate. The following table presents RSU activity for the years ended January 31, 2016 and February 3, 2013, adjusted for forfeitures (as there were not RSU activities for the fiscal year ended February 2, 2014): 3, 2019:| | | Whole | | | Grant-Date | | | Aggregate | | | Compensation | | | Grant-Date Fair Value | | | | | Number of | | | Fair Value | | | Grant-Date | | | Expense | | | Unrecognized At | | | | | Units | | | Per Unit | | | Fair Value | | | Recognized | | | February 3, 2019 | | Previous Awards (vested) | | | | | | | | | | | | | | $ | 255 | | | | | | | | | | | | | | | | | | | | | | | | | | | | RSUs Awarded on April 13, 2016 | | | 7,622 | | | $ | 24.26 | | | $ | 185 | | | | 156 | | | $ | 6 | | Forfeited | | | (3,143 | ) | | | | | | | (23 | ) | | | | | | | | | RSUs Awarded on April 15, 2017 | | | 6,257 | | | $ | 30.03 | | | | 185 | | | | 94 | | | | 42 | | Forfeited | | | (2,579 | ) | | | | | | | (49 | ) | | | | | | | | | RSUs Awarded on June 4, 2018 | | | 6,032 | | | $ | 35.86 | | | | 216 | | | | 54 | | | | 162 | | | | | | | | | | | | | | | | | | | | | | | | Awards outstanding at February 3, 2019: | | | 14,189 | | | | | | | $ | 514 | | | $ | 304 | | | $ | 210 | |
| | | Whole | | | Grant-Date | | | Aggregate | | | Compensation | | | Grant-Date Fair Value | | | | | Number of | | | Fair Value | | | Grant-Date | | | Expense | | | Unrecognized At | | | | | Units | | | Per Unit | | | Fair Value | | | Recognized | | | January 31, 2016 | | | Previous Awards (vested) | | | | | | | | | | | $ | 305 | | | | | | | | | | | | | | | | | | | | | | | | RSUs Awarded on April 15, 2014 | | | 7,322 | | | $ | 12.91 | | | | 95 | | | | 63 | | | | 32 | | | RSUs Awarded on April 6, 2015 | | | 5,518 | | | $ | 17.52 | | | | 97 | | | | 27 | | | | 70 | | | | | | | | | | | | | | | | | | | | | | | | | Awards outstanding at January 31, 2016: | | | 12,840 | | | | | | | $ | 192 | | | $ | 90 | | | $ | 102 | |
NOTE 1215 – EARNINGS PER SHARE
We refer you to the Earnings Per Share disclosure in Note 1-Summary2-Summary of Significant Accounting Policies, above, for more detailed information concerning the calculation of earnings per share. We have issued restricted stock awards to non-employee directors since 2006 and certain management employees since 2014 and have issued restricted stock units (RSUs) to certain senior executives since fiscal 2012, under the Company’s Stock Incentive Plan. 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 year-end dates indicated: | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Restricted shares | | | 24,919 | | | | 27,458 | | | | 28,614 | | | Restricted stock units | | | 12,840 | | | | 24,546 | | | | 32,353 | | | | | | 37,759 | | | | 52,004 | | | | 60,967 | |
| | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | Restricted shares | | | 22,070 | | | | 15,777 | | | | 25,682 | | Restricted stock units | | | 14,189 | | | | 19,397 | | | | 20,462 | | | | | | 36,259 | | | | 35,174 | | | | 46,144 | |
All restricted shares awarded that have not yet vested are considered when computing diluted earnings per share. Unlike the restricted stock grants issued to our non-employee directors, the transfer of ownership of common shares issued under our RSUs, if any, occurs after the three-year vesting period; however, RSUs are also considered when computing diluted earnings per share. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
The following table sets forth the computation of basic and diluted earnings per share:
| | | Fifty-Two | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Net income | | $ | 16,185 | | | $ | 12,578 | | | $ | 7,929 | | | Less: Dividends on unvested restricted shares | | | 11 | | | | 11 | | | | 12 | | | Net earnings allocated to unvested restricted stock | | | 40 | | | | 33 | | | | 22 | | | Earnings available for common shareholders | | $ | 16,134 | | | $ | 12,534 | | | $ | 7,895 | | | | | | | | | | | | | | | | Weighted average shares outstanding for basic earnings per share | | | 10,779 | | | | 10,736 | | | | 10,722 | | | Dilutive effect of unvested restricted stock awards | | | 28 | | | | 35 | | | | 30 | | Weighted average shares outstanding for diluted earnings per share | | | 10,807 | | | | 10,771 | | | | 10,752 | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 1.50 | | | $ | 1.17 | | | $ | 0.74 | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 1.49 | | | $ | 1.16 | | | $ | 0.74 | |
We completed the acquisition| | | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | Net income | | $ | 39,873 | | | $ | 28,250 | | | $ | 25,287 | | Less: Dividends on unvested restricted shares | | | 11 | | | | 10 | | | | 11 | | Net earnings allocated to unvested restricted stock | | | 68 | | | | 50 | | | | 56 | | Earnings available for common shareholders | | $ | 39,794 | | | $ | 28,190 | | | $ | 25,220 | | | | | | | | | | | | | | | | Weighted average shares outstanding for basic earnings per share | | | 11,759 | | | | 11,633 | | | | 11,531 | | Dilutive effect of unvested restricted stock awards | | | 24 | | | | 30 | | | | 32 | | Weighted average shares outstanding for diluted earnings per share | | | 11,783 | | | | 11,663 | | | | 11,563 | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.19 | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 3.38 | | | $ | 2.42 | | | $ | 2.18 | |
In fiscal year 2018, we issued 176,018 shares of substantially all of the assets of Home Meridian International subsequentcommon stock to the enddesignees of our 2016 fiscal yearSFI as partial consideration for the Shenandoah acquisition on February 1, 2016. Upon completion, weSeptember 29, 2017. We issued 716,910 shares of our common stock to designees of Home Meridian as partial consideration for the acquisition.Home Meridian acquisition on the first day of fiscal 2017. F-34
NOTE 1316 – INCOME TAXES Our provision for income taxes was as follows for the periods indicated:
| | | Fifty-Two | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | Current expense | | | | | | | | | | | Federal | | $ | 7,196 | | | $ | 6,024 | | | $ | 3,755 | | | Foreign | | | 41 | | | | 40 | | | | 41 | | | State | | | 771 | | | | 635 | | | | 403 | | | Total current expense | | | 8,008 | | | | 6,699 | | | | 4,199 | | | | | | | | | | | | | | | | | Deferred taxes | | | | | | | | | | | | | | Federal | | | 244 | | | | 97 | | | | 214 | | | State | | | 22 | | | | 24 | | | | 126 | | | Total deferred taxes | | | 266 | | | | 121 | | | | 340 | | | Income tax expense | | $ | 8,274 | | | $ | 6,820 | | | $ | 4,539 | |
| | | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | Current expense | | | | | | | | | | | | | Federal | | $ | 10,537 | | | $ | 12,022 | | | $ | 14,470 | | Foreign | | | 118 | | | | 85 | | | | 86 | | State | | | 2,247 | | | | 1,390 | | | | 1,471 | | Total current expense | | | 12,902 | | | | 13,497 | | | | 16,027 | | | | | | | | | | | | | | | | Deferred taxes | | | | | | | | | | | | | Federal | | | (963 | ) | | | 4,038 | | | | (1,902 | ) | State | | | (222 | ) | | | (13 | ) | | | (216 | ) | Total deferred taxes | | | (1,185 | ) | | | 4,025 | | | | (2,118 | ) | Income tax expense | | $ | 11,717 | | | $ | 17,522 | | | $ | 13,909 | |
Total tax expense for fiscal 20162019 was $8.6$11.6 million, of which $8.3$11.7 million expense was allocated to continuing operations and $277,000 was allocated to other comprehensive income. Total$73,000 tax expense for fiscal 2015 was $6.6 million, of which $6.8 million was allocated to continuing operations and $254,000 benefit was allocated to other comprehensive income. Total tax expense for fiscal 20142018 was $4.5$17.5 million, of which $4.5$17.5 million was allocated to continuing operations and $59,000$26,000 tax benefit was allocated to Other Comprehensive Income.
Noteswhich $13.9 million was allocated to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
continuing operations and $204,000 expense was allocated to other comprehensive income.The effective income tax rate differed from the federal statutory tax rate as follows for the periods indicated: | | | Fifty-Three | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | February 3, | | | January 28, | | | January 29, | | | | | 2019 | | | 2018 | | | 2017 | | | | | | | | | | | | | | | | Income taxes at statutory rate | | | 21.0 | % | | | 33.9 | % | | | 35.0 | % | Increase (decrease) in tax rate resulting from: | | | | | | | | | | | | | State taxes, net of federal benefit | | | 3.2 | | | | 2.0 | | | | 2.2 | | Officer's life insurance | | | -0.7 | | | | -0.6 | | | | -1.2 | | Captive Life Insurance | | | 0.0 | | | | 0.0 | | | | -1.3 | | Tax Cuts and Jobs Act of 2017 | | | 0.0 | | | | 4.0 | | | | 0.0 | | Change in Valuation allowance | | | 0.0 | | | | 0.0 | | | | 1.3 | | Other | | | -0.8 | | | | -1.0 | | | | -0.5 | | Effective income tax rate | | | 22.7 | % | | | 38.3 | % | | | 35.5 | % |
| | | Fifty-Two | | | Fifty-Two | | | Fifty-Two | | | | | Weeks Ended | | | Weeks Ended | | | Weeks Ended | | | | | January 31, | | | February 1, | | | February 2, | | | | | 2016 | | | 2015 | | | 2014 | | | | | | | | | | | | | | Income taxes at statutory rate | | | 35.0 | % | | | 35.0 | % | | | 34.0 | % | | Increase (decrease) in tax rate resulting from: | | | | | | | | | | | | | | State taxes, net of federal benefit | | | 2.1 | | | | 2.0 | | | | 2.1 | | | Domestic Production Deduction | | | (0.6 | ) | | | - | | | | - | | | Officer's life insurance | | | (1.1 | ) | | | (1.2 | ) | | | (1.8 | ) | | Other, net | | | (1.6 | ) | | | (0.6 | ) | | | 2.1 | | | Effective income tax rate | | | 33.8 | % | | | 35.2 | % | | | 36.4 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities for the period indicated were:
| | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | Assets | | | | | | | | Deferred compensation | | $ | 4,345 | | | $ | 4,120 | | | Allowance for bad debts | | | 380 | | | | 492 | | | State income taxes | | | 43 | | | | 8 | | | Property, plant and equipment | | | - | | | | 405 | | | Intangible assets | | | 703 | | | | 524 | | | Charitable contribution carryforward | | | - | | | | 246 | | | Inventories | | | 158 | | | | - | | | Other | | | 378 | | | | 404 | | | Total deferred tax assets | | | 6,007 | | | | 6,199 | | | Valuation allowance | | | - | | | | - | | | | | | 6,007 | | | | 6,199 | | | Liabilities | | | | | | | | | | Employee benefits | | | 256 | | | | 362 | | | Inventories | | | - | | | | 143 | | | Property, plant and equipment | | | 321 | | | | - | | | Total deferred tax liabilities | | | 577 | | | | 505 | | | Net deferred tax asset without AOCI | | | 5,430 | | | | 5,694 | | | | | | | | | | | | | Deferred tax asset (liability) in AOCI | | | (80 | ) | | | 198 | | | Total net deferred tax asset | | $ | 5,350 | | | $ | 5,892 | |
| | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | Assets | | | | | | | | | Deferred compensation | | $ | 3,572 | | | $ | 3,226 | | Allowance for bad debts | | | 1,236 | | | | 1,437 | | Inventories | | | 882 | | | | - | | Capital loss carryover | | | 339 | | | | 335 | | Other | | | 1,120 | | | | 692 | | Total deferred tax assets | | | 7,149 | | | | 5,690 | | Valuation allowance | | | (339 | ) | | | (335 | ) | | | | | 6,810 | | | | 5,355 | | Liabilities | | | | | | | | | Inventory | | | - | | | | 315 | | Intangible assets | | | 923 | | | | 108 | | Property, plant and equipment | | | 1,288 | | | | 1,520 | | Unrecognized pension actuarial losses | | | 77 | | | | 148 | | Total deferred tax liabilities | | | 2,288 | | | | 2,091 | | Net deferred tax assets | | $ | 4,522 | | | $ | 3,264 | |
At February 3, 2019 and January 31, 2016 and February 1, 201528, 2018 our net deferred tax asset was $5.4$4.5 million and $5.9$3.3 million, respectively. The increase in the valuation allowance of $4,000 was due to the change in deferred state tax rates. We expect to fully realize the benefit of the deferred tax assets, with the exception of the capital loss, in future periods when the amounts become deductible. Notes to Consolidated Financial Statements - Continued
(Tables The capital loss carry forward is $1.4 million and expires in thousands, except per share data)
At February 1, 2015, we had an uncertain tax position of $284,000 related to our investment in a captive insurance arrangement. The reserve decreased to $74,000 at January 31, 2016. Also, at February 1, 2015, we had a reserve of $142,000 for an uncertain tax position related to the use of state loss carryforwards in our tax returns. The balance of this reserve was $147,000 at January 31, 2016. We expect $55,000 of this uncertain tax position to be settled during the next twelve months.
fiscal 2022.Current accounting standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also addresses de-recognition, classification, interest and penalties, accounting in interim periods and disclosures. A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the fiscal years ended February 3, 2019 and January 31, 2016 and February 1, 201528, 2018 are as follows: | | | January 31, | | | February 1, | | | | | 2016 | | | 2015 | | | | | | | | | | | Balance, beginning of year | | $ | 482 | | | $ | 359 | | | Increase related to prior year tax positions | | | - | | | | 75 | | | Decrease related to prior year tax positions | | | (203 | ) | | | - | | | Increase related to current year tax positions | | | - | | | | 48 | | | Balance, end of year | | $ | 279 | | | $ | 482 | |
| | | February 3, | | | January 28, | | | | | 2019 | | | 2018 | | | | | | | | | | | | Balance, beginning of year | | $ | 91 | | | $ | 248 | | Increase related to prior year tax positions | | | - | | | | - | | Decrease related to prior year tax positions | | | (48 | ) | | | (157 | ) | Increase related to current year tax positions | | | - | | | | - | | Balance, end of year | | $ | 43 | | | $ | 91 | |
The net unrecognized tax benefits as of January 31, 2016,February 3, 2019, which, if recognized, would affect our effective tax rate are $221,000.$38,000. We expect that $74,000$39,000 of gross unrecognized tax benefits will decrease within the next year. We have elected to classify interest and penalties recognized with respect to unrecognized tax benefits as income tax expense. Interest expense of $12,000$5,600 and $26,000$10,000 was accrued as of February 3, 2019 and January 31, 2016 and February 1, 2015,28, 2018, respectively. Tax years ending January 30, 2013,February 1, 2016, through January 31, 2016February 3, 2019 remain subject to examination by federal and state taxing authorities. An examination of the fiscal 2013 with federal taxing authorities was completed during fiscal 2016 with no changes. An examination of our North Carolina state tax returns for fiscal year 2012 and 2013 is underway with the North Carolina Department of Revenue. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
NOTE 1417 – 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 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 the All Other segment with Company’s H Contract business and the remains on the Company’s Homeware division, which was shuttered in fiscal year 2018. The Home Meridian segment remains unchanged. Therefore, for financial reporting purposes, we are organized into three operatingtwo reportable segments – casegoods furniture, upholstered furniture and an “All Other” segment,, which includes H Contract and Homeware. 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, Shenandoah Furniture, and H Contract and Homeware, two businesses started in 2013. None of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280. |
The following table presents segment information for the periods, and as of the dates, indicated:
| | | Fifty-Three Weeks Ended | | | | | | | Fifty-Two Weeks Ended | | | | | | | Fifty-Two Weeks Ended | | | | | | | | | February 3, 2019 | | | | | | | January 28, 2018 | | | | | | | January 29, 2017 | | | | | | | | | | | | | % Net | | | | | | | % Net | | | | | | | % Net | | Net Sales | | | | | | Sales | | | | | | | Sales | | | | | | | Sales | | Hooker Branded | | $ | 178,710 | | | | 26.2 | % | | $ | 166,754 | | | | 26.9 | % | | $ | 158,685 | | | | 27.5 | % | Home Meridian | | | 387,825 | | | | 56.7 | % | | | 365,472 | | | | 58.9 | % | | | 344,635 | | | | 59.7 | % | All other | | | 116,966 | | | | 17.1 | % | | | 88,406 | | | | 14.2 | % | | | 73,899 | | | | 12.8 | % | Consolidated | | $ | 683,501 | | | | 100.0 | % | | $ | 620,632 | | | | 100.0 | % | | $ | 577,219 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | Hooker Branded | | $ | 58,122 | | | | 32.5 | % | | $ | 53,007 | | | | 31.8 | % | | $ | 51,653 | | | | 32.6 | % | Home Meridian | | | 62,850 | | | | 16.2 | % | | | 62,325 | | | | 17.1 | % | | | 57,289 | | | | 16.6 | % | All other | | | 26,015 | | | | 22.2 | % | | | 19,485 | | | | 22.0 | % | | | 17,179 | | | | 23.2 | % | Consolidated | | $ | 146,987 | | | | 21.5 | % | | $ | 134,817 | | | | 21.7 | % | | $ | 126,121 | | | | 21.8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Income | | | | | | | | | | | | | | | | | | | | | | | | | Hooker Branded | | $ | 25,269 | | | | 14.1 | % | | $ | 22,139 | | | | 13.3 | % | | $ | 20,472 | | | | 12.9 | % | Home Meridian | | | 18,828 | | | | 4.9 | % | | | 17,828 | | | | 4.9 | % | | | 14,687 | | | | 4.3 | % | All other | | | 8,578 | | | | 7.3 | % | | | 5,487 | | | | 6.2 | % | | | 4,642 | | | | 6.3 | % | Consolidated | | $ | 52,675 | | | | 7.7 | % | | $ | 45,454 | | | | 7.3 | % | | $ | 39,801 | | | | 6.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Expenditures | | | | | | | | | | | | | | | | | | | | | | | | | Hooker Branded | | $ | 843 | | | | | | | $ | 1,372 | | | | | | | $ | 1,193 | | | | | | Home Meridian | | | 534 | | | | | | | | 1,098 | | | | | | | | 280 | | | | | | All other | | | 3,837 | | | | | | | | 696 | | | | | | | | 981 | | | | | | Consolidated | | $ | 5,214 | | | | | | | $ | 3,166 | | | | | | | $ | 2,454 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation & Amortization | | | | | | | | | | | | | | | | | | | | | | | | | Hooker Branded | | $ | 1,979 | | | | | | | $ | 1,956 | | | | | | | $ | 2,214 | | | | | | Home Meridian | | | 2,407 | | | | | | | | 2,716 | | | | | | | | 4,704 | | | | | | All other | | | 3,056 | | | | | | | | 1,975 | | | | | | | | 1,082 | | | | | | Consolidated | | $ | 7,442 | | | | | | | $ | 6,647 | | | | | | | $ | 8,000 | | | | | |
| | | As of February 3, | | | | | | | As of January 28, | | | | | | | | | | | | | | | | | 2019 | | | %Total | | | 2018 | | | %Total | | | | | | | | | | Assets | | | | | | Assets | | | | | | | Assets | | | | | | | | | | Hooker Branded | | $ | 108,445 | | | | 36.9 | % | | $ | 130,184 | | | | 47.9 | % | | | | | | | | | Home Meridian | | | 144,277 | | | | 49.1 | % | | | 107,283 | | | | 39.4 | % | | | | | | | | | All other | | | 41,181 | | | | 14.0 | % | | | 34,394 | | | | 12.7 | % | | | | | | | | | Consolidated Assets | | $ | 293,903 | | | | 100.0 | % | | $ | 271,861 | | | | 100.0 | % | | | | | | | | | Consolidated Goodwill and Intangibles | | | 75,813 | | | | | | | | 78,197 | | | | | | | | | | | | | | Total Consolidated Assets | | $ | 369,716 | | | | | | | | 350,058 | | | | | | | | | | | | | |
F-38
| | | Fifty-Two Weeks Ended | | | Fifty-Two Weeks Ended | | | Fifty-Two Weeks Ended | | | | | January 31, 2016 | | | | | | February 1, 2015 | | | | | | February 2, 2014 | | | | | | | | | | | % Net | | | | | | % Net | | | | | | % Net | | | Net Sales | | | | | Sales | | | | | | Sales | | | | | | Sales | | | Casegoods | | $ | 155,106 | | | | 62.8 | % | | $ | 153,882 | | | | 63.0 | % | | $ | 143,802 | | | | 63.0 | % | | Upholstery | | | 84,090 | | | | 34.0 | % | | | 86,362 | | | | 35.3 | % | | | 83,027 | | | | 36.4 | % | | All other | | | 8,033 | | | | 3.3 | % | | | 5,025 | | | | 2.1 | % | | | 1,487 | | | | 0.7 | % | | Intercompany eliminations | | | (230 | ) | | | | | | | (919 | ) | | | | | | | (23 | ) | | | | | | Consolidated | | $ | 246,999 | | | | 100.0 | % | | $ | 244,350 | | | | 100.0 | % | | $ | 228,293 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | | | | | | | | | | | | | | | | | | | | | | | | Casegoods | | $ | 47,558 | | | | 30.7 | % | | $ | 44,868 | | | | 29.2 | % | | $ | 38,762 | | | | 27.0 | % | | Upholstery | | | 18,852 | | | | 22.4 | % | | | 16,489 | | | | 19.1 | % | | | 15,393 | | | | 18.5 | % | | All other | | | 2,252 | | | | 28.0 | % | | | 1,465 | | | | 29.2 | % | | | 588 | | | | 39.5 | % | | Intercompany eliminations | | | 26 | | | | | | | | (22 | ) | | | | | | | (18 | ) | | | | | | Consolidated | | $ | 68,688 | | | | 27.8 | % | | $ | 62,800 | | | | 25.7 | % | | $ | 54,725 | | | | 24.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Income | | | | | | | | | | | | | | | | | | | | | | | | | | Casegoods | | $ | 18,509 | | | | 11.9 | % | | $ | 17,286 | | | | 11.2 | % | | $ | 12,150 | | | | 8.4 | % | | Upholstery | | | 6,020 | | | | 7.2 | % | | | 2,871 | | | | 3.3 | % | | | 1,913 | | | | 2.3 | % | | All other | | | (293 | ) | | | -3.6 | % | | | (1,087 | ) | | | -21.6 | % | | | (1,542 | ) | | | -103.7 | % | | Intercompany eliminations | | | 26 | | | | | | | | (22 | ) | | | | | | | (18 | ) | | | | | | Consolidated | | $ | 24,262 | | | | 9.8 | % | | $ | 19,048 | | | | 7.8 | % | | $ | 12,503 | | | | 5.5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital Expenditures | | | | | | | | | | | | | | | | | | | | | | | | | | Casegoods | | $ | 2,219 | | | | | | | $ | 2,124 | | | | | | | $ | 2,489 | | | | | | | Upholstery | | | 621 | | | | | | | | 830 | | | | | | | | 982 | | | | | | | All other | | | 7 | | | | | | | | 40 | | | | | | | | - | | | | | | | Consolidated | | $ | 2,847 | | | | | | | $ | 2,994 | | | | | | | $ | 3,471 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | & Amortization | | | | | | | | | | | | | | | | | | | | | | | | | | Casegoods | | $ | 1,808 | | | | | | | $ | 1,591 | | | | | | | $ | 1,551 | | | | | | | Upholstery | | | 1,126 | | | | | | | | 1,005 | | | | | | | | 940 | | | | | | | All other | | | 12 | | | | | | | | 3 | | | | | | | | - | | | | | | | Consolidated | | $ | 2,946 | | | | | | | $ | 2,599 | | | | | | | $ | 2,491 | | | | | |
| | | As of January 31, | | | | | | | As of February 1, | | | | | | | | | | | | | | | | | 2016 | | | %Total | | | 2015 | | | %Total | | | | | | | | | | | Total Assets | | | | | | Assets | | | | | | | Assets | | | | | | | | | | | Casegoods | | $ | 146,794 | | | | 80.8 | % | | $ | 135,403 | | | | 79.3 | % | | | | | | | | | | Upholstery | | | 34,010 | | | | 18.7 | % | | | 33,788 | | | | 19.8 | % | | | | | | | | | | All other | | | 863 | | | | 0.5 | % | | | 1,605 | | | | 0.9 | % | | | | | | | | | | Intercompany eliminations | | | (14 | ) | | | | | | | (41 | ) | | | | | | | | | | | | | | Consolidated | | $ | 181,653 | | | | 100.0 | % | | $ | 170,755 | | | | 100.0 | % | | | | | | | | |
Sales by product type are as follows: | | | Net Sales (in thousands) | | | | | Fiscal | | | | | 2019 | | | | | | | 2018 | | | | | | | 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Casegoods | | $ | 417,677 | | | | 61 | % | | $ | 404,808 | | | | 65 | % | | $ | 391,347 | | | | 68 | % | Upholstery | | | 265,824 | | | | 39 | % | | | 215,824 | | | | 35 | % | | | 185,872 | | | | 32 | % | | | | $ | 683,501 | | | | | | | $ | 620,632 | | | | | | | $ | 577,219 | | | | | |
No significant long-lived assets were held outside the United States at either February 3, 2019 or January 31, 2016 or February 2, 2014.28, 2018. International customers accounted for approximately 5%1.2% of consolidated invoiced sales in fiscal 20162019, 2.5% fiscal 2018 and approximately 6%2% of consolidated netinvoiced sales in both fiscal 20152017. We define international sales as sales outside of the United States and fiscal 2014. Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
Canada.NOTE 1518 – COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS Customs Penalty
In September 2009, U.S. CustomsLegal contingencies We are a party to legal proceedings and Border Protection (“CBP”) issuedclaims which arise during the ordinary course of business. We review our legal proceedings and claims and other legal matters on an audit report asserting thatongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we haddisclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our condensed financial statements to not paid allbe misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although we will make disclosures for material matters as required antidumping duties dueby ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with respect to certain bedroom furniture we imported from China. In February 2015, CBP assessed a civil penaltylegal counsel regarding the ultimate outcome of approximately $2.1 million and unpaid duties of approximately $500,000 on the matter. In December 2015,the fiscal 2019 third quarter, we recorded a $4.0 million liability and related insurance proceeds receivable for a claim arising from a lawsuit in responsewhich we were named a defendant. The lawsuit stemmed from an auto-accident involving an independent contractor that had delivered products to one of our petitiondistribution facilities immediately prior to eliminate or modify the assessment, CBP revisedaccident. During the proposed penalty to approximately $1.7fiscal 2019 third quarter, the Company and its insurance carriers reached a $4.0 million while leavingsettlement with the duty assessment at approximately $500,000. We continue to assert that no antidumping duties are dueplaintiff and that there is no basisour insurance carriers reimbursed us for the imposition of a penalty. We intend to vigorously defend againstfull $4.0 million settlement amount. The lawsuit was dismissed by the penalty. Incourt during the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity. fiscal 2019 fourth quarter.Commitments and Off BalanceOff-Balance Sheet Arrangements
We lease office space, warehousing facilities, showroom space and office equipment under leases expiring over the next five years. Rent expense was $3.1$10.1 million in fiscal 2016, $2.82019, $9.0 million in fiscal 20152018, and $2.3$7.7 million in fiscal 2014.2017. Future minimum annual commitments under leases and operating agreements are $3.0$7.8 million in fiscal 2017, $1.72020, $7.2 million in fiscal 2018 and $1.42021, $5.3 million in each of fiscal 2019,2022 and $3.6 million in fiscal 2020 and fiscal 2021.
2023.We had letters of credit outstanding totaling $1.7$2.3 million on January 31, 2016.February 3, 2019. We utilize letters of credit to collateralize certain imported inventory purchases and certain insurance arrangements. Substantially all of the cash value of our company owned life insurance is pledged as collateral for our secured term loan. In the ordinary course of our business, we may become involved in legal proceedings involving contractual and employment relationships, product liability claims, intellectual property rights and a variety of other matters. We do not believe that any pending legal proceedings will have a material impact on our financial position or results of operations.
Our business is subject to a number of significant risks and uncertainties, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see “Forward Looking Statements” beginning on page 3 of this report and Item 1A, “Risk Factors” beginning on page 12 of this report.
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
NOTE 1619 – CONCENTRATIONS OF SOURCING RISK
Imported Products Sourcing We source imported products through approximately 18 differentmultiple vendors, from approximately 20 separate factories, located in fiveeight countries. Because of the large number and diverse nature of the foreign factories from which we can source our imported products, we have some flexibility in the placement of products in any particular factory or country.
Factories located in ChinaVietnam and VietnamChina are a critical resource for Hooker Furniture. In fiscal year 2016,2019, imported products sourced from ChinaVietnam and VietnamChina accounted for 68% and 26%, respectively,nearly all of our import purchases and the factoryour top five suppliers in China from which we directly source the most productthose countries accounted for 58%approximately half of our worldwide purchases of imported product.fiscal 2019 import purchases. A disruption in our supply chain from this factory,Vietnam or from China or Vietnam in general, could significantly impact our ability to fill customer orders for products manufactured at that factory or in that country. Raw Materials Sourcing for Domestic Upholstery Manufacturing Our five largest domestic upholstery suppliers accounted for approximately 28% of our raw materials supply purchases for domestic upholstered furniture manufacturing operations in fiscal 2019. One supplier accounted for 7.5% of our raw material purchases in fiscal 2019. Should disruptions with these suppliers occur, we believe we could successfully source these products from other suppliers without significant disruption to our operations. Concentration of Sales and Accounts Receivable No customer accounted for more than 10% of our consolidated sales in fiscal 2019. Our top five customers accounted for nearly one-third of our fiscal 2019 consolidated sales. The loss of any one or more of these customers could adversely affect our earnings, financial condition and liquidity. At February 3, 2019, nearly half of our consolidated accounts receivable is concentrated in our top five customers. Should any one of these receivables become uncollectible, it would have an immediate and material adverse impact on our financial condition and liquidity. NOTE 1720 – CONSOLIDATED QUARTERLY DATA (Unaudited- see accompanying accountant’s report.) | | | Fiscal Quarter | | | | | First | | | Second | | | Third | | | Fourth | | | 2016 | | | | | | | | | | | | | | Net sales | | $ | 60,956 | | | $ | 60,140 | | | $ | 65,338 | | | $ | 60,565 | | | Cost of sales | | | 44,581 | | | | 44,047 | | | | 47,173 | | | | 42,510 | | | Gross profit | | | 16,375 | | | | 16,093 | | | | 18,165 | | | | 18,055 | | | Selling and administrative expenses | | | 11,133 | | | | 10,234 | | | | 11,525 | | | | 11,534 | | | Net income | | | 3,472 | | | | 3,938 | | | | 4,630 | | | | 4,145 | | | Basic earnings per share | | $ | 0.32 | | | $ | 0.36 | | | $ | 0.43 | | | $ | 0.38 | | | Diluted earnings per share | | $ | 0.32 | | | $ | 0.36 | | | $ | 0.43 | | | $ | 0.38 | |
| 2015 | | | | | | | | | | | | | | | | | | Net sales | | $ | 61,396 | | | $ | 54,883 | | | $ | 63,168 | | | $ | 64,903 | | | Cost of sales | | | 45,786 | | | | 41,226 | | | | 47,137 | | | | 47,401 | | | Gross profit | | | 15,610 | | | | 13,657 | | | | 16,031 | | | | 17,502 | | | Selling and administrative expenses | | | 11,367 | | | | 10,243 | | | | 11,148 | | | | 10,994 | | | Net income | | | 2,804 | | | | 2,272 | | | | 3,204 | | | | 4,298 | | | Basic earnings per share | | $ | 0.26 | | | $ | 0.21 | | | $ | 0.30 | | | $ | 0.40 | | | Diluted earnings per share | | $ | 0.26 | | | $ | 0.21 | | | $ | 0.30 | | | $ | 0.40 | |
| | | Fiscal Quarter | | | | | First | | | Second | | | Third | | | Fourth | | 2019 | | | | | | | | | | | | | | | | | Net sales | | $ | 142,892 | | | $ | 168,661 | | | $ | 171,474 | | | $ | 200,475 | | Cost of sales | | | 110,926 | | | | 133,016 | | | | 135,638 | | | | 156,935 | | Gross profit | | | 31,966 | | | | 35,645 | | | | 35,836 | | | | 43,540 | | Selling and administrative expenses | | | 21,990 | | | | 23,184 | | | | 22,979 | | | | 23,777 | | Net income | | | 7,154 | | | | 8,693 | | | | 9,332 | | | | 14,691 | | Basic earnings per share | | $ | 0.61 | | | $ | 0.74 | | | $ | 0.79 | | | $ | 1.25 | | Diluted earnings per share | | $ | 0.61 | | | $ | 0.74 | | | $ | 0.79 | | | $ | 1.24 | |
2018 | | | | | | | | | | | | | | | | | Net sales | | $ | 130,872 | | | $ | 156,308 | | | $ | 157,934 | | | $ | 175,518 | | Cost of sales | | | 102,729 | | | | 123,191 | | | | 123,656 | | | | 136,239 | | Gross profit | | | 28,143 | | | | 33,117 | | | | 34,278 | | | | 39,279 | | Selling and administrative expenses | | | 20,570 | | | | 20,858 | | | | 22,318 | | | | 23,533 | | Net income | | | 4,746 | | | | 7,778 | | | | 7,202 | | | | 8,524 | | Basic earnings per share | | $ | 0.41 | | | $ | 0.67 | | | $ | 0.62 | | | $ | 0.72 | | Diluted earnings per share | | $ | 0.41 | | | $ | 0.67 | | | $ | 0.61 | | | $ | 0.72 | |
Earnings per share for each fiscal quarter is derived using the weighted average number of shares outstanding during that quarter. Earnings per share for each fiscal year is derived using the weighted average number of shares outstanding on an annual basis. Consequently, the sum of earnings per share for the quarters of a fiscal year may not equal earnings per share for the full fiscal year. NotesNOTE 21- RELATED PARTY TRANSACTIONS We lease the four properties utilized in Shenandoah’s operations. One of our employees has an ownership interest in the entities that own these properties. The leases commenced on September 29, 2017 and an option to Consolidated Financial Statements - Continued(Tablesrenew each for an additional seven years. All four leases include annual rent escalation clauses with respect to minimum lease payments after the initial 84-month term of the lease is completed. In addition to monthly lease payments, we also incur expenses for property taxes, routine repairs and maintenance and other operating expenses. We paid $821,000 in thousands, except per share data)
lease payments to these entities during fiscal 2019.NOTE 18 –22- SUBSEQUENT EVENTS Acquisition of Home Meridian International
On February 1, 2016, we completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“Home Meridian”) pursuant to the Asset Purchase Agreement into which we and Home Meridian entered on January 5, 2016 (the “Asset Purchase Agreement”). Upon completion, we paid $85 million in cash and issued 716,910 shares of our common stock (the “Stock Consideration”) to designees of Home Meridian as consideration for the Acquisition. The Stock Consideration consisted of (i) 530,598 shares due to the $15 million of consideration payable in shares of our common stock under the Asset Purchase Agreement, and (ii) 186,312 shares issued pursuant to working capital adjustments detailed in the Asset Purchase Agreement. The working capital adjustment was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of 2015. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of our common stock for the fifteen trading days immediately preceding the closing date ($28.27). Under the Asset Purchase Agreement, we also assumed certain liabilities of Home Meridian, including approximately $7.8 million of liabilities related to certain retirement plans. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of Home Meridian.
Also on February 1, 2016, we entered into an amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of this acquisition. The Loan Agreement increases the amount available under our existing unsecured revolving credit facility to $30 million and increases the sublimit of such facility available for the issuance of letters of credit to $4 million. Amounts outstanding under the revolving facility will 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.
The Loan Agreement also provides us with a $41 million unsecured term loan (the “Unsecured Term Loan”) and a $19 million term loan (the “Secured 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”). BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Loan Agreement. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. Any amount borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 0.50%. We must repay any principal amount borrowed under 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. We must pay the interest accrued on any principal amount 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. We may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty. On February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan and the Secured Term Loan in connection with the completion of this acquisition.
The Loan Agreement includes customary representations and warranties and requires us to comply with certain customary covenants, including, among other things, the following financial covenants: (i) maintaining at least a specified minimum level of tangible net worth, (ii) maintaining a ratio of funded debt to EBITDA not exceeding a specified amount and (iii) maintaining a basic fixed charge coverage ratio within a specified range. The Loan Agreement also limits our right to incur other indebtedness and to create liens upon our assets, subject to certain exceptions, among other restrictions. The 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 Loan Agreement.
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
Since the closing date we have made unscheduled payments of $5.0 million on the Unsecured Term Loan and $1.8 million on the Secured Term Loan, in addition to the regularly scheduled debt service payments required by the Loan agreement.
Pro forma consolidated net sales and net income for the combined entity are estimated to be $571 million and $22.5 million, respectively, for the year ended January 31, 2016. These pro forma estimates assume the transaction took place on February 2, 2015, the beginning of Hooker Furniture’s 2016 fiscal year, which end on January 31, 2016. The pro forma net sales and net earnings estimates include estimates for interest expense related to the Bank of America Acquisition Credit Facility and amortization expense of identified intangible assets, net of the elimination of historical amortization of Home Meridian intangible assets. The pro forma net sales and net earnings estimates exclude non-recurring transaction related costs from the statement of operations of both companies and interest expense paid by Home Meridian under its former credit agreement.
Fair Value Estimates of Assets Acquired and Liabilities Assumed
The consideration and components of Hooker Furniture’s initial fair value allocation of the purchase price paid at closing and in the subsequent Net Working Capital Adjustment consisted of the following:
| Fair value estimates of assets acquired and liabilities assumed | | | Purchase price consideration | | | | | Cash paid for assets acquired | | $ | 85,000 | | | Value of shares issued for assets acquired | | | 15,000 | | | Value of shares issued for excess net working capital | | | 5,267 | | | Cash paid for net working capital adjustment | | | 995 | | | | | | | | | Total purchase price | | $ | 106,262 | | | | | | | | | | | | | | | Accounts receivable | | $ | 45,360 | | | Inventory | | | 37,607 | | | Prepaid expenses and other current assets | | | 2,045 | | | Property and equipment | | | 5,814 | | | Intangible assets | | | 28,800 | | | Goodwill | | | 21,023 | | | Accounts payable and accrued expenses | | | (18,948 | ) | | Accrued expenses | | | (6,783 | ) | | Pension plan and deferred compensation liabilities | | | (8,656 | ) | | | | | | | | Total purchase price | | $ | 106,262 | |
Substantially all of these amounts are subject to subsequent adjustment as we continue to gather information during the measurement period. Certain intangible assets were acquired as part this transaction. Trade names, customer relationships, and order backlog have been assigned preliminary fair values subject to additional analysis during the measurement period. Some of these intangible assets have been assigned useful lives while others have been determined to be indefinite-lived.
Notes to Consolidated Financial Statements - Continued
(Tables in thousands, except per share data)
We have not yet determined the composition of our operating segments for the combined entity. We expect to be able to deduct goodwill for income tax purposes; however, book and tax goodwill may differ due to differences in book and tax capitalization rules.
On March 1, 2016,3, 2019, our Board of Directors declared a quarterly cash dividend of $0.10$0.15 per share, payable on March 31, 201629, 2019 to shareholders of record at March 15, 2016.
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