UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period endedended October 28, 2018November 3, 2019
Commission file number 000-25349
HOOKER FURNITURE CORPORATION
(Exact name of registrant as specified in its charter)
Virginia | 54-0251350 |
(State or other jurisdiction of incorporation or organization) | (IRS employer identification no.) |
440 East Commonwealth Boulevard, Martinsville, VA 24112
(Address of principal executive offices, zip code)
(276) 632-2133
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)... Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer ☐ | Accelerated | |
Non-accelerated Filer ☐ | Smaller reporting company ☐ | |
Emerging growth company ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of eachSecurities registered pursuant to Section 12(b) of the issuer’s classes of common stock as of November 30, 2018:Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common |
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As of December 6, 2019, there were 11,838,367shares of the registrant’s common stock outstanding.
PART I. FINANCIAL INFORMATION |
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Item 1. | 3 | |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. OTHER INFORMATION |
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Item 6. |
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PART I. FINANCIAL INFORMATION
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
As of | October 28, | January 28, | November 3, | February 3, | ||||||||||||
2018 | 2018 | 2019 | 2019 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | 29,449 | $ | 30,915 | $ | 24,498 | $ | 11,435 | ||||||||
Trade accounts receivable, net | 86,978 | 92,461 | 92,603 | 112,557 | ||||||||||||
Inventories | 100,743 | 84,459 | 103,615 | 105,204 | ||||||||||||
Income tax recoverable | 2,348 | - | ||||||||||||||
Prepaid expenses and other current assets | 6,667 | 5,314 | 4,119 | 5,735 | ||||||||||||
Insurance proceeds receivable | 4,000 | - | ||||||||||||||
Total current assets | 227,837 | 213,149 | 227,183 | 234,931 | ||||||||||||
Property, plant and equipment, net | 28,105 | 29,249 | 30,782 | 29,482 | ||||||||||||
Cash surrender value of life insurance policies | 23,499 | 23,622 | 25,016 | 23,816 | ||||||||||||
Deferred taxes | 2,979 | 3,264 | 3,035 | 4,522 | ||||||||||||
Operating leases right-of-use assets | 40,872 | - | ||||||||||||||
Intangible assets, net | 36,351 | 38,139 | 33,967 | 35,755 | ||||||||||||
Goodwill | 40,058 | 40,058 | 40,058 | 40,058 | ||||||||||||
Other assets | 1,453 | 2,235 | 1,528 | 1,152 | ||||||||||||
Total non-current assets | 132,445 | 136,567 | 175,258 | 134,785 | ||||||||||||
Total assets | $ | 360,282 | $ | 349,716 | $ | 402,441 | $ | 369,716 | ||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
Current liabilities | ||||||||||||||||
Current portion of term loans | $ | 6,112 | $ | 7,528 | $ | 5,833 | $ | 5,829 | ||||||||
Trade accounts payable | 38,355 | 32,685 | 27,407 | 40,838 | ||||||||||||
Accrued salaries, wages and benefits | 9,019 | 9,218 | 5,449 | 8,002 | ||||||||||||
Income tax accrual | 1,419 | 3,711 | - | 3,159 | ||||||||||||
Customer deposits | 3,480 | 3,951 | 13,030 | 3,023 | ||||||||||||
Current portion of lease liabilities | 6,395 | - | ||||||||||||||
Other accrued expenses | 3,464 | 2,894 | 3,913 | 3,564 | ||||||||||||
Legal contingency | 4,000 | - | ||||||||||||||
Total current liabilities | 65,849 | 59,987 | 62,027 | 64,415 | ||||||||||||
Long term debt | 31,574 | 45,778 | 25,253 | 29,628 | ||||||||||||
Deferred compensation | 11,433 | 11,164 | 10,611 | 11,513 | ||||||||||||
Pension plan | - | 2,441 | ||||||||||||||
Lease liabilities | 35,304 | - | ||||||||||||||
Other long-term liabilities | 1,002 | 886 | 3 | 984 | ||||||||||||
Total long-term liabilities | 44,009 | 60,269 | 71,171 | 42,125 | ||||||||||||
Total liabilities | 109,858 | 120,256 | 133,198 | 106,540 | ||||||||||||
Shareholders’ equity | ||||||||||||||||
Common stock, no par value, 20,000 shares authorized, 11,785 and 11,762 shares issued and outstanding on each date | 49,390 | 48,970 | ||||||||||||||
Common stock, no par value, 20,000 shares authorized, 11,838 and 11,785 shares issued and outstanding on each date | 51,177 | 49,549 | ||||||||||||||
Retained earnings | 200,457 | 180,122 | 218,131 | 213,380 | ||||||||||||
Accumulated other comprehensive income | 577 | 368 | ||||||||||||||
Accumulated other comprehensive (loss) income | (65 | ) | 247 | |||||||||||||
Total shareholders’ equity | 250,424 | 229,460 | 269,243 | 263,176 | ||||||||||||
Total liabilities and shareholders’ equity | $ | 360,282 | $ | 349,716 | $ | 402,441 | $ | 369,716 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
For the | For the | |||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | Nov 3, | Oct 28, | Nov 3, | Oct 28, | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net sales | $ | 171,474 | $ | 157,934 | $ | 483,026 | $ | 445,114 | $ | 158,176 | $ | 171,474 | $ | 445,942 | $ | 483,026 | ||||||||||||||||
Cost of sales | 135,638 | 123,656 | 379,079 | 349,576 | 129,777 | 135,638 | 363,201 | 379,079 | ||||||||||||||||||||||||
Casualty loss | - | - | 500 | - | - | - | - | 500 | ||||||||||||||||||||||||
Total cost of sales | 135,638 | 123,656 | 379,579 | 349,576 | ||||||||||||||||||||||||||||
Total Cost of sales | 129,777 | 135,638 | 363,201 | 379,579 | ||||||||||||||||||||||||||||
Gross profit | 35,836 | 34,278 | 103,447 | 95,538 | 28,399 | 35,836 | 82,741 | 103,447 | ||||||||||||||||||||||||
Selling and administrative expenses | 22,979 | 22,318 | 68,150 | 63,746 | 22,810 | 22,979 | 67,286 | 68,150 | ||||||||||||||||||||||||
Intangible asset amortization | 596 | 624 | 1,788 | 1,291 | 596 | 596 | 1,788 | 1,788 | ||||||||||||||||||||||||
Operating income | 12,261 | 11,336 | 33,509 | 30,501 | 4,993 | 12,261 | 13,667 | 33,509 | ||||||||||||||||||||||||
Other income, net | 200 | 199 | 275 | 659 | 309 | 200 | 215 | 275 | ||||||||||||||||||||||||
Interest expense, net | 354 | 327 | 1,099 | 860 | 316 | 354 | 986 | 1,099 | ||||||||||||||||||||||||
Income before income taxes | 12,107 | 11,208 | 32,685 | 30,300 | 4,986 | 12,107 | 12,896 | 32,685 | ||||||||||||||||||||||||
Income tax expense | 2,775 | 4,006 | 7,504 | 10,574 | 1,066 | 2,775 | 2,829 | 7,504 | ||||||||||||||||||||||||
Net income | $ | 9,332 | $ | 7,202 | $ | 25,181 | $ | 19,726 | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Basic | $ | 0.79 | $ | 0.62 | $ | 2.14 | $ | 1.70 | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.14 | ||||||||||||||||
Diluted | $ | 0.79 | $ | 0.61 | $ | 2.13 | $ | 1.69 | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.13 | ||||||||||||||||
Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
Basic | 11,763 | 11,679 | 11,758 | 11,596 | 11,789 | 11,763 | 11,782 | 11,758 | ||||||||||||||||||||||||
Diluted | 11,778 | 11,700 | 11,778 | 11,626 | 11,816 | 11,778 | 11,821 | 11,778 | ||||||||||||||||||||||||
Cash dividends declared per share | $ | 0.14 | $ | 0.12 | $ | 0.42 | $ | 0.36 | $ | 0.15 | $ | 0.14 | $ | 0.45 | $ | 0.42 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
For the | For the | |||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | November 3, | October 28, | November 3, | October 28, | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net Income | $ | 9,332 | $ | 7,202 | $ | 25,181 | $ | 19,726 | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||||||||||
Other comprehensive income (loss): | ||||||||||||||||||||||||||||||||
Gain on pension plan settlement | (520 | ) | - | (520 | ) | - | ||||||||||||||||||||||||||
Income tax effect on settlement | 124 | - | 124 | - | ||||||||||||||||||||||||||||
Amortization of actuarial loss | 43 | 15 | 129 | 46 | 37 | 43 | 111 | 129 | ||||||||||||||||||||||||
Income tax effect on amortization | (10 | ) | (5 | ) | (31 | ) | (17 | ) | (9 | ) | (10 | ) | (27 | ) | (31 | ) | ||||||||||||||||
Adjustments to net periodic benefit cost | 33 | 10 | 98 | 29 | (368 | ) | 33 | (312 | ) | 98 | ||||||||||||||||||||||
Reclassification of tax effects due to the adoption of ASU 2018-02 (see Note 2) | - | - | 111 | - | ||||||||||||||||||||||||||||
Reclassification of tax effects due to the adoption of ASU 2018-02 | - | - | - | 111 | ||||||||||||||||||||||||||||
Total Comprehensive Income | $ | 9,365 | $ | 7,212 | $ | 25,390 | $ | 19,755 | $ | 3,552 | $ | 9,365 | $ | 9,755 | $ | 25,390 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS
(In thousands)
(Unaudited)
For the | For the | |||||||||||||||
Thirty-Nine Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 28, | October 29, | Nov 3, | Oct 28, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Operating Activities: | ||||||||||||||||
Net income | $ | 25,181 | $ | 19,726 | $ | 10,067 | $ | 25,181 | ||||||||
Adjustments to reconcile net in provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 5,558 | 4,399 | 5,260 | 5,558 | ||||||||||||
Gain on pension settlement | (520 | ) | - | |||||||||||||
Gain on disposal of assets | (66 | ) | (37 | ) | (271 | ) | (66 | ) | ||||||||
Deferred income tax expense | 254 | 1,735 | 1,461 | 254 | ||||||||||||
Noncash restricted stock and performance awards | 919 | 1,175 | 891 | 919 | ||||||||||||
(Benefit from)/provision for doubtful accounts and sales allowances | (1,692 | ) | 125 | |||||||||||||
Provision/(benefit from) for doubtful accounts and sales allowances | 1,365 | (1,692 | ) | |||||||||||||
Gain on life insurance policies | (608 | ) | (453 | ) | (715 | ) | (608 | ) | ||||||||
Changes in assets and liabilities: | ||||||||||||||||
Trade accounts receivable | 8,147 | 16,179 | 18,589 | 9,036 | ||||||||||||
Inventories | 1,589 | (16,862 | ) | |||||||||||||
Income tax recoverable | - | (954 | ) | (2,348 | ) | - | ||||||||||
Inventories | (16,862 | ) | (5,867 | ) | ||||||||||||
Prepaid expenses, other current assets and insurance proceeds receivable | (484 | ) | (836 | ) | ||||||||||||
Trade accounts payable and legal contingency | 5,566 | (3,529 | ) | |||||||||||||
Prepaid expenses and other current assets | (638 | ) | (484 | ) | ||||||||||||
Trade accounts payable | (13,456 | ) | 5,566 | |||||||||||||
Accrued salaries, wages, and benefits | (484 | ) | (539 | ) | (2,553 | ) | (484 | ) | ||||||||
Accrued income taxes | (2,412 | ) | (4,323 | ) | (3,159 | ) | (2,412 | ) | ||||||||
Customer deposits | (470 | ) | (1,314 | ) | 10,006 | (1,359 | ) | |||||||||
Operating lease liabilities | 536 | - | ||||||||||||||
Other accrued expenses | 503 | (254 | ) | 350 | 503 | |||||||||||
Deferred compensation | (2,253 | ) | (435 | ) | 156 | (2,253 | ) | |||||||||
Other long-term liabilities | 122 | 267 | - | 122 | ||||||||||||
Net cash provided by operating activities | $ | 20,919 | $ | 25,065 | $ | 26,610 | $ | 20,919 | ||||||||
Investing Activities: | ||||||||||||||||
Acquisitions | - | (32,650 | ) | |||||||||||||
Purchases of property and equipment | (2,464 | ) | (2,708 | ) | (4,745 | ) | (2,464 | ) | ||||||||
Proceeds received on notes from sale of assets | 99 | 98 | ||||||||||||||
Proceeds received from sale of assets | 1,465 | 99 | ||||||||||||||
Proceeds received on life insurance policies | 1,225 | - | - | 1,225 | ||||||||||||
Premiums paid on life insurance policies | (620 | ) | (639 | ) | (558 | ) | (620 | ) | ||||||||
Net cash used in investing activities | (1,760 | ) | (35,899 | ) | (3,838 | ) | (1,760 | ) | ||||||||
Financing Activities: | ||||||||||||||||
Proceeds from long-term debt | - | 12,000 | ||||||||||||||
Payments for long-term debt | (15,679 | ) | (4,393 | ) | (4,393 | ) | (15,679 | ) | ||||||||
Debt issuance cost | - | (39 | ) | |||||||||||||
Cash dividends paid | (4,946 | ) | (4,169 | ) | (5,316 | ) | (4,946 | ) | ||||||||
Net cash (used in)/provided by financing activities | (20,625 | ) | 3,399 | |||||||||||||
Net cash used in financing activities | (9,709 | ) | (20,625 | ) | ||||||||||||
Net decrease in cash and cash equivalents | (1,466 | ) | (7,435 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | 13,063 | (1,466 | ) | |||||||||||||
Cash and cash equivalents - beginning of year | 30,915 | 39,792 | 11,435 | 30,915 | ||||||||||||
Cash and cash equivalents - end of quarter | $ | 29,449 | $ | 32,357 | $ | 24,498 | $ | 29,449 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid for income taxes | $ | 9,661 | $ | 14,103 | $ | 6,754 | $ | 9,661 | ||||||||
Cash paid for interest, net | 973 | 754 | 852 | 973 | ||||||||||||
Non-cash transactions: | ||||||||||||||||
Acquisition cost paid in common stock | $ | - | $ | 8,396 | ||||||||||||
Increase in lease liabilities arising from obtaining right-of-use assets | $ | 272 | $ | - | ||||||||||||
Increase in property and equipment through accrued purchases | 104 | 26 | 25 | 104 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
Accumulated | ||||||||||||||||||||
Other | Total | |||||||||||||||||||
Common Stock | Retained | Comprehensive | Shareholders' | |||||||||||||||||
Shares | Amount | Earnings | Income | Equity | ||||||||||||||||
Balance at January 28, 2018 | 11,762 | $ | 48,970 | $ | 180,122 | $ | 368 | $ | 229,460 | |||||||||||
Net income | 25,181 | 25,181 | ||||||||||||||||||
Prior year adjustment for ASU 2014-09 and 2018-02 | 99 | 111 | 210 | |||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $31 | 98 | 98 | ||||||||||||||||||
Cash dividends paid and accrued ($0.14 per share) | (4,945 | ) | (4,945 | ) | ||||||||||||||||
Restricted stock grants, net of forfeitures | 23 | (30 | ) | (30 | ) | |||||||||||||||
Restricted stock compensation cost | 450 | 450 | ||||||||||||||||||
Balance at October 28, 2018 | 11,785 | $ | 49,390 | $ | 200,457 | $ | 577 | $ | 250,424 | |||||||||||
Balance at February 3, 2019 | 11,785 | $ | 49,549 | $ | 213,380 | $ | 247 | $ | 263,176 | |||||||||||
Net income | 10,067 | 10,067 | ||||||||||||||||||
Gain on pension settlement, net of tax of $124 | (396 | ) | (396 | ) | ||||||||||||||||
Unrealized loss on defined benefit plan, net of tax of $27 | 84 | 84 | ||||||||||||||||||
Cash dividends paid and accrued ($0.15 per share) | (5,316 | ) | (5,316 | ) | ||||||||||||||||
Restricted stock grants, net of forfeitures | 53 | 344 | 344 | |||||||||||||||||
Restricted stock compensation cost | 600 | 600 | ||||||||||||||||||
Recognition of PSUs as equity-based awards | 684 | 684 | ||||||||||||||||||
Balance at November 3, 2019 | 11,838 | $ | 51,177 | $ | 218,131 | $ | (65 | ) | $ | 269,243 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Thirty-Nine Weeks Ended October 28, 2018November 3, 2019
1. Preparation of Interim Financial Statements
The condensed consolidated financial statements of Hooker Furniture Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature, except as indicated in Note 2, below.nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 28, 2018February 3, 2019 (“20182019 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.
On September 29, 2017, we completed the previously disclosed acquisition of substantially all the assets of Shenandoah Furniture, Inc. (the “Shenandoah acquisition”). The results of operations of Shenandoah were included in our results of operations beginning on September 29, 2017 through the end of our fiscal 2018 third quarter ended on October 29, 2017.
The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began July 30, 2018,August 5, 2019, and the thirty-nine week period (also referred to as “nine months,”months”, “nine-month period” or “year-to-date period”) that began January 29, 2018,February 4, 2019, which both ended October 28, 2018.November 3, 2019. This report discusses our results of operations for this period compared to the 2019 fiscal year thirteen-week period that began July 31, 201730, 2018 and the thirty-nine weekthirty-nine-week period that began January 30, 2017,29, 2018, which both ended October 29, 2017;28, 2018; and our financial condition as of October 28, 2018November 3, 2019 compared to January 28, 2018.February 3, 2019.
References in these notes to the condensed consolidated financial statements of the Company to:
■ | the 2020 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 4, 2019 and will end February 2, 2020; and |
■ | the 2019 fiscal year and comparable terminology mean the fifty-three-week fiscal year that began January 29, 2018 and |
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2. Recently Adopted Accounting Policies
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 11 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,No. 2016-02, StatementLeases (Topic 842) (“Topic 842”), which requires lessees to recognize lease right-of-use assets and liabilities on-balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. We adopted Topic 842 standard on February 4, 2019 and used the effective date transition method. As a result, our condensed consolidated balance sheets prior to February 4, 2019 were not restated and continue to be reported under previous guidance that did not require the recognition of Cash Flows (Topic 230): Classificationlease liabilities and corresponding lease assets on the condensed consolidated balance sheets. In addition, we have elected the package of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows. Its objective ispractical expedients, which allowed us not to reduce existing diversity in practice with respect to these items. Among the types of cash flows addressed are payments for costsreassess prior conclusions related to debt prepaymentsthe expired or extinguishments, payments representing accreted interest on discounted debt, paymentsexisting leases, and not to reassess the accounting for initial direct costs. As a result of contingent consideration after a business combination, proceeds from insurance claimsthe adoption of Topic 842, we have operating lease right-of-use assets of $40.9 million and company-owned life insurance and distributions from equity method investees, among others. We adopted ASU 2016-15operating lease liabilities of $41.7 million as of the beginning of our 2019 fiscal year on January 29, 2018.November 3, 2019. The adoption of this guidanceTopic 842 did not have a material impact uponon our financial conditioncondensed consolidated statements of income and condensed consolidated statement of cash flows for the three-month or results of operations.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This new standard replaced most existing revenue recognition guidance in GAAPnine-month period ended November 3, 2019. See Note 9 for additional information and codified guidance under FASBdisclosures required by 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.842.
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.3. Accounts Receivable
In accordance with the new guidance, we recognize revenue at an amount that reflects the consideration we expect to be entitled to receive in exchange for transferring goods or services to our customers. Our policy is to record revenue when control of the goods transfers to the customer. We have a present right to payment at the time of shipment as customers are invoiced at that time. We believe the customer obtains control of goods at the time of shipment, which is typically when title passes. While the customer may not enjoy immediate physical possession of the products, the customers’ right to re-direct shipment indicates control.
Net sales are comprised of gross revenues from sales of home furnishings and hospitality furniture products less trade discounts and customer allowances. Other revenues, primarily royalties, are immaterial to our overall results. Payment is typically due within 30-60 days of shipment for customers qualifying for payment terms. Collectability is reasonably assured since we extend credit to customers for whom we have performed credit evaluations and/or from whom we have received a down payment or deposit. Due to the highly-customized nature of our hospitality products, we typically require substantial prepayments on these orders, with the balance due within 30 days of delivery.
We regularly review and revise accounts receivable for doubtful accounts and customer allowances based upon historical bad debts and customer allowances and any agreements with specific customers. If the financial condition of a customer or customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt allowances may be required. Orders are generally non-cancellable once loaded into a shipping trailer or container. Physical product returns are very rare due to the high probability of damages to our products in return transit.
The transaction price for each contract is the stated price of the product, reduced by any stated discounts or allowances at that point in time. We do not engage in sales of products that attach a future material right which could result in a separate performance obligation for the purchase of goods in the future at a material discount. The implicit contract with the customer, as reflected in the order acknowledgement and invoice, states the final terms of the sale, including the description, quantity, and price of each product purchased. The transaction price reflects the amount of estimated consideration to which we expect to be entitled. This amount of variable consideration included in the transaction price, and measurement of net sales, is included in net sales only to the extent that it is probable that there will be no significant reversal in a future period.
In the very limited instances when products are sold under consignment arrangements, we do not recognize revenue until control over such products has transferred to the end consumer.
We record contract liabilities when we receive partial or full payment prior to fulfilling a performance obligation. Contract liabilities related to revenues are recorded in “Customer Deposits” on the accompanying condensed consolidated balance sheets. We had contract liabilities of $3.5 million as of October 28, 2018.
As part of our adoption of Topic 606, we elected the following practical expedients and policy elections:
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3. Casualty Loss
On May 18, 2018, the Martinsville/Henry County, Va. area experienced torrential rains. Two of our Hooker Branded segment warehouse facilities were damaged as a result. The casualty loss caused only a nominal disruption in our ability to fulfill and ship orders. The costs associated with the recovery efforts exceeded our insurance deductible of $500,000. Consequently, we recorded a $500,000 casualty loss during the fiscal 2019 second quarter. We incurred another $409,000 of repair and remediation-related expenses during the third quarter, which we received from our casualty insurer in early December 2018.
November 3, | February 3, | |||||||
2019 | 2019 | |||||||
Trade accounts receivable | $ | 98,818 | $ | 117,732 | ||||
Other accounts receivable allowances | (5,452 | ) | (4,267 | ) | ||||
Allowance for doubtful accounts | (763 | ) | (908 | ) | ||||
Accounts receivable | $ | 92,603 | $ | 112,557 |
4. Accounts Receivable
October 28, | January 28, | |||||||
2018 | 2018 | |||||||
Trade accounts receivable | $ | 91,356 | $ | 98,592 | ||||
Other accounts receivable allowances | (3,472 | ) | (5,117 | ) | ||||
Allowance for doubtful accounts | (906 | ) | (1,014 | ) | ||||
Accounts receivable | $ | 86,978 | $ | 92,461 |
5. Commitments and Contingencies
We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our condensed financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although we will make disclosures for material matters as required by ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter.
In the fiscal 2019 third quarter, we recorded a $4.0 million liability and related insurance proceeds receivable for a claim arising from a lawsuit in which we were named a defendant. The liability is recorded in the “Legal contingency” line of our condensed consolidated balance sheets. The insurance proceeds receivable is recorded in the “Insurance proceeds receivable” line of our condensed consolidated balance sheets. The lawsuit stemmed from an auto-accident involving a trucking firm that had delivered products to one of our distribution facilities immediately prior to the accident. During the fiscal 2019 third quarter, the Company and its insurance carriers reached a $4.0 million settlement with the plaintiff; consequently, our insurance carriers will pay the $4.0 million settlement amount to the plaintiff on our behalf. The settlement is awaiting court approval which we expect in the 2019 fourth quarter. Based on consultation with legal counsel, we believe it is probable (as defined in ASC 450-20) the lawsuit will settle for $4.0 million and obtain court approval. The settlement of this claim is not expected to adversely affect our financial position or liquidity.
6. Inventories
October 28, | January 28, | |||||||
2018 | 2018 | |||||||
Finished furniture | $ | 107,695 | $ | 92,502 | ||||
Furniture in process | 2,483 | 1,440 | ||||||
Materials and supplies | 9,808 | 8,780 | ||||||
Inventories at FIFO | 119,986 | 102,722 | ||||||
Reduction to LIFO basis | (19,243 | ) | (18,263 | ) | ||||
Inventories | $ | 100,743 | $ | 84,459 |
November 3, | February 3, | |||||||
2019 | 2019 | |||||||
Finished furniture | $ | 116,501 | $ | 112,847 | ||||
Furniture in process | 1,092 | 1,825 | ||||||
Materials and supplies | 8,965 | 10,896 | ||||||
Inventories at FIFO | 126,558 | 125,568 | ||||||
Reduction to LIFO basis | (22,943 | ) | (20,364 | ) | ||||
Inventories | $ | 103,615 | $ | 105,204 |
7.5. Property, Plant and Equipment
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| Depreciable Lives |
| October 28, |
| January 28, |
| Depreciable Lives | November 3, | February 3, | |||||||||||||
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| (In years) |
| 2018 |
| 2018 |
| (In years) | 2019 | 2019 | |||||||||||||
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Buildings and land improvements |
| 15 - 30 |
| $ | 24,539 |
| $ | 24,298 |
| 15 - 30 | $ | 31,295 | $ | 24,588 | |||||||||
Computer software and hardware |
| 3 - 10 |
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| 18,568 |
| 18,302 |
| 3 - 10 | 19,100 | 18,719 | ||||||||||||
Machinery and equipment |
| 10 |
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| 8,827 |
| 8,586 |
| 10 | 9,116 | 8,934 | ||||||||||||
Leasehold improvements |
| Term of lease |
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| 9,282 |
| 8,982 |
| Term of lease | 9,443 | 9,376 | ||||||||||||
Furniture and fixtures |
| 3 - 10 |
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| 2,290 |
| 2,186 |
| 3 - 10 | 2,454 | 2,318 | ||||||||||||
Other |
| 5 |
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| 652 |
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| 612 |
| 5 | 650 | 665 | |||||||||||
Total depreciable property at cost |
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| 64,158 |
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| 62,966 |
| 72,058 | 64,600 | ||||||||||
Less accumulated depreciation |
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| 38,786 |
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| 35,100 |
| 42,853 | 39,925 | ||||||||||
Total depreciable property, net |
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| 25,372 |
| 27,866 |
| 29,205 | 24,675 | |||||||||||
Land |
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| 1,067 |
| 1,067 |
| 1,077 | 1,067 | |||||||||||
Construction-in-progress |
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| 1,666 |
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| 316 |
| 500 | 3,740 | ||||||||||
Property, plant and equipment, net |
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| $ | 28,105 |
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| 29,249 |
| $ | 30,782 | $ | 29,482 |
8.6. Fair Value Measurements
Fair value is the price that would be received upon the sale of an asset or paid upon the transfer of a liability (an exit price) in an orderly transaction between market participants on the applicable measurement date. We use a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
■ | Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; |
■ | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
■ | Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. |
As of October 28, 2018November 3, 2019 and January 28, 2018,February 3, 2019, Company-owned life insurance was measured at fair value on a recurring basis based on Level 2 inputs. The fair value of the Company-owned life insurance is determined by inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Additionally, the fair value of the Company-owned life insurance is marked to market each reporting period and any change in fair value is reflected in income for that period.
AsOn January 30, 2019, our Board of January 28, 2018,Directors voted to terminate the assets of the Home Meridian segment’s legacyPension Plan. We settled all Pension Plan (the “Pension Plan”) were measured at fair value on a recurring basis based on Level 1 inputs. Pension Plan assets, held in a trust account byobligations during the Plan’s trustee, primarily consistedquarter with the purchase of a wide-range of mutual fund asset classes, including domestic and international equities, fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries. As of January 31, 2018, the date of the latest actuarial valuation, Pension Plan assets were netted against the Plan’s Projected Benefit Obligation (“PBO”) on that date to determine the Pension Plan’s funded status. Since the PBO exceeded the market value of the Pension Plan’s assets, the funded status was recorded in our condensed consolidated balance sheets as a net liability. 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. As of October 28, 2018, the net assetannuities for this plan was $617,000 shown on the “Other assets” line of our condensed consolidated balance sheets. The market value of pension plan assets shown below is as of January 31, 2018.participants. See Note 11. Employee Benefit Plans for additional information about the Plan.
Our assets measured at fair value on a recurring basis at October 28, 2018November 3, 2019 and January 28, 2018,February 3, 2019, were as follows:
Fair value at October 28, 2018 | Fair value at January 28, 2018 | Fair value at November 3, 2019 | Fair value at February 3, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets measured at fair value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Company-owned life insurance | $ | - | $ | 23,499 | $ | - | $ | 23,499 | $ | - | $ | 23,622 | $ | - | $ | 23,622 | $ | - | $ | 25,016 | $ | - | $ | 25,016 | $ | - | $ | 23,816 | $ | - | $ | 23,816 | ||||||||||||||||||||||||||||||||
Pension Plan assets* | 8,757 | - | - | 8,757 | 8,757 | - | - | 8,757 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pension Plan assets | $ | - | - | - | - | 10,992 | - | - | 10,992 |
* as of January 28, 2018 for Pension Plan assets.7.Intangible Assets
9. Intangible Assets
October 28, | January 28, | November 3, | February 3, | ||||||||||||||||||
Non-amortizable Intangible Assets | Segment | 2018 | 2018 | Segment | 2019 | 2019 | |||||||||||||||
Goodwill | Home Meridian | $ | 23,187 | $ | 23,187 | Home Meridian | $ | 23,187 | $ | 23,187 | |||||||||||
Goodwill | All Other | 16,871 | 16,871 | All Other | 16,871 | 16,871 | |||||||||||||||
Total Goodwill | 40,058 | 40,058 | Total Goodwill | 40,058 | 40,058 | ||||||||||||||||
Trademarks and trade names - Home Meridian | Home Meridian | 11,400 | 11,400 | Home Meridian | 11,400 | 11,400 | |||||||||||||||
Trademarks and trade names - Bradington-Young | All Other | 861 | 861 | All Other | 861 | 861 | |||||||||||||||
Trademarks and trade names - Sam Moore | All Other | 396 | 396 | All Other | 396 | 396 | |||||||||||||||
Total Trademarks and trade names | $ | 12,657 | $ | 12,657 | Total Trademarks and trade names | $ | 12,657 | $ | 12,657 | ||||||||||||
Total non-amortizable assets | $ | 52,715 | $ | 52,715 | Total non-amortizable assets | $ | 52,715 | $ | 52,715 |
Our amortizable intangible assets are recorded in our Home Meridian segment and All Other. The carrying amounts and changes therein of those amortizable intangible assets were as follows:
Amortizable Intangible Assets | ||||||||||||
Customer | ||||||||||||
Relationships | Trademarks | Totals | ||||||||||
Balance at January 28, 2018 | $ | 24,644 | $ | 838 | $ | 25,482 | ||||||
Amortization | (1,743 | ) | (45 | ) | (1,788 | ) | ||||||
Balance at October 28, 2018 | $ | 22,901 | $ | 793 | $ | 23,694 |
Amortizable Intangible Assets | ||||||||||||
Customer | ||||||||||||
Relationships | Trademarks | Totals | ||||||||||
Balance at February 3, 2019 | $ | 22,320 | $ | 778 | $ | 23,098 | ||||||
Amortization | (1,743 | ) | (45 | ) | (1,788 | ) | ||||||
Balance at November 3, 2019 | $ | 20,577 | $ | 733 | $ | 21,310 |
For the fourth quarterremainder of fiscal 2019,2020, amortization expense is expected to be approximately $596,000.
10. Long-Term Debt8. Customer Deposits
We made an unscheduled $10Due to the highly customized nature of our hospitality products, we typically require a 50% deposit with order, a 40% deposit before goods reach a U.S. port and the remaining 10% balance due within 30 days of the receipt of goods by the customer. These deposits have increased $10.0 million payment during the first quarter ofsince our fiscal 2019 towards the amounts outstanding under the New Unsecured Term Loan. Consequently, we wrote off $6,000year-end principally due to increased order activity in capitalized debt issuance costs to interest expense. As of October 28, 2018, unamortized debt issuance costs of $60,000 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.Home Meridian segment’s hospitality division.
9. Leases
On February 4, 2019, we adopted Accounting Standards Codification Topic 842 Leases. Our lease assets are composed of real estate and equipment. Real estate leases consist primarily of warehouses and offices, while equipment leases consist of vehicles, office and warehouse equipment. At the inception of a contract, we assess whether the contract is, or contains, a lease. Our assessment is based on: (a) whether there is an identified asset in the contract that is land or a depreciable asset – i.e. property, plant or equipment; (b) whether we have the right to control the use of the identified asset throughout the period of use, which may be different from the overall contract term; and (c) whether we have the right to direct the use of an identified asset if it can direct (and change) how and for what purpose the asset will be used throughout the period of use.
Leases are classified as either finance leases or operating leases based on criteria in Topic 842. All of our leases are classified as operating leases. We do not currently have finance leases but could in the future.
Operating lease right-of-use ("ROU") assets and liabilities are recognized on the adoption date based on the present value of lease payments over the remaining lease term. As interest rates are not explicitly stated or implicit in any of our leases, we utilized our incremental borrowing rate at the adoption date of February 4, 2019, which was one-month LIBOR plus 1.5%. For leases without explicitly stated or implicit interest rates that commenced after the adoption date, we used our incremental borrowing rate which was one-month LIBOR at the lease commencement date plus 1.5%. ROU assets also include any lease payments made and exclude lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
At the inception of a lease, we allocate the consideration in the contract to each lease and non-lease component based on the component's relative stand-alone price to determine the lease payments. Lease and non-lease components are accounted for separately. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Some of our real estate leases contain variable lease payments, including payments based on the percentage increase in the Consumer Price Index for Urban Consumers (“CPI-U”). We used February 2019 CPI-U issued by the US Department of Labor’s Bureau of Labor Statistics to measure lease payments and calculate lease liabilities. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded when incurred.
We have a sub-lease at one of our warehouses. In accordance with the provisions of Topic 842, since we have not been relieved as the primary obligor of the warehouse lease, we cannot net the sublease income against our lease payment to calculate the lease liability and ROU asset. Our practice has been, and we will continue to, straight-line the sub-lease income over the term of the sublease. We recognized $130,000 and $347,000 sub-lease income for the three-month and nine-month period ended November 3, 2019, respectively.
Our leases have remaining lease terms of less than one year to seven years, some of which include options to extend the leases for up to seven years. We have elected not to recognize ROU assets and lease liabilities that arise from short term leases for any class of underlying asset. Short term leases are leases with lease terms of 12 months or less with either (a) no renewal option or (b) a renewal option which we are not reasonably certain to exercise.
We have elected to adopt a package of practical expedients provided under Topic 842 that allows us not to reassess: (a) whether expired or existing contracts contain a lease under the new definition of a lease; (b) lease classification of expired or existing leases; and (c) whether previously capitalized initial direct costs would qualify for capitalization under Topic 842.
The components of lease cost and supplemental cash flow information for leases for the three-month and nine-month periods ended November 3, 2019 were:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||
November 3, 2019 | November 3, 2019 | |||||||
Operating lease cost | $ | 2,090 | $ | 6,289 | ||||
Short-term lease cost | 173 | 467 | ||||||
Total operating lease cost | $ | 2,263 | $ | 6,756 | ||||
Operating cash outflows | $ | 1,918 | $ | 6,255 |
The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of November 3, 2019 were:
November 3, 2019 | ||||
Real estate | $ | 39,750 | ||
Property and equipment | 1,122 | |||
Total operating leases right-of-use assets | $ | 40,872 | ||
Current portion of operating lease liabilities | $ | 6,395 | ||
Long term operating lease liabilities | 35,304 | |||
Total operating lease liabilities | $ | 41,699 |
Weighted-average remaining lease term is 7.5 years. We used our incremental borrowing rate which is LIBOR plus 1.5% at the adoption date. The weighted-average discount rate is 4.00%.
The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheet at November 3, 2019:
Undiscounted Future Operating Lease Payments | ||||
Remainder of 2019 | $ | 2,327 | ||
2020 | 7,732 | |||
2021 | 7,114 | |||
2022 | 5,520 | |||
2023 | 5,267 | |||
2024 and thereafter | 20,394 | |||
Total lease payments | $ | 48,354 | ||
Less: impact of discounting | (6,655 | ) | ||
Present value of lease payments | $ | 41,699 |
As of October 28, 2018,November 3, 2019, we did not have any additional operating or finance leases that had not yet commenced.
10.Long-Term Debt
As of November 3, 2019, we had an aggregate $28.5$25.7 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.5$4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of October 28, 2018.November 3, 2019. There were no additional borrowings outstanding under the revolving credit facility as of October 28, 2018.November 3, 2019.
11.11. Employee Benefit Plans
We maintain three retirement plans for the benefit of certain former and current employees, including a supplemental retirement income plan (“SRIP”) for certain former and current employees of Hooker Furniture Corporation, as well as two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, which we assumed when we acquired the business of Home Meridian International. These legacy pension plan obligations include:
■ | the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. The SERP is an unfunded plan and all benefits are paid solely out of our general assets; and |
■ | the Pension Plan for former Pulaski Furniture Corporation employees. |
The SRIP, SERP and Pension Plan are all “frozen” and we do not expect to add additional participants to any of these plans in the future.
On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. We settled all Pension Plan assets includeobligations during the quarter with the purchase of nonparticipating annuity contracts for plan participants. Consequently, we recognized a range of mutual fund asset classes and are measured at fair value using Level 1 inputs,$520,000 settlement gain during the quarter, which are quoted prices in active markets.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net periodic benefit costs | ||||||||||||||||
Service cost | 81 | 76 | 243 | 228 | ||||||||||||
Interest cost | 206 | 280 | 618 | 839 | ||||||||||||
Actuarial loss | 43 | 15 | 129 | 45 | ||||||||||||
Expected return on pension plan assets | (144 | ) | (234 | ) | (431 | ) | (700 | ) | ||||||||
Expected administrative expenses | 70 | 70 | 210 | 210 | ||||||||||||
Consolidated net periodic benefit costs | $ | 256 | $ | 207 | $ | 769 | $ | 622 |
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 includedis recorded in the “other income” line item “Other income, net” inof our condensed consolidated statements of income. Service cost is includedThe $520,000 represented an amount recorded in our condensed consolidated statements ofaccumulated other comprehensive income under “Selling and administrative expenses.” The adoption resulted inuntil the reclassification of $131,000 and $393,000 expense from Selling and administrative expenses to Other income, net in the third quarter and first nine months of our fiscal 2018 condensed consolidated statements of income.pension obligation was settled upon plan termination.
The expected long-term rate of return on Pension Plan assets is 6.9% as of the Pension Plan’s most recent valuation date of January 28, 2018.
We contributed $110,000 in required contributions to the Pension Plan in the fiscal 2019 first quarter. In the third quarter, we made an additional $3 million contribution to the Pension Plan as part of a Pension Plan asset de-risking strategy. As part of this strategy, Pension Plan assets were moved into generally lower risk investments to preserve asset value. No benefits have accrued under the Pension Plan since it was frozen in March 1995. We expect savings from reduced Pension Plan administrative costs and PBGC premiums as a result of this contribution.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net periodic benefit costs | ||||||||||||||||
Service cost | 26 | 81 | 78 | 243 | ||||||||||||
Interest cost | 204 | 206 | 613 | 618 | ||||||||||||
Actuarial loss | 37 | 43 | 111 | 129 | ||||||||||||
Expected return on pension plan assets | (101 | ) | (144 | ) | (304 | ) | (431 | ) | ||||||||
Pension plan administrative expenses | 98 | 70 | 293 | 210 | ||||||||||||
Consolidated net periodic benefit costs | $ | 264 | $ | 256 | $ | 791 | $ | 769 |
The SRIP and SERP plans are unfunded plans. Consequently, weWe paid $171,000 in the third quarter and $520,000 in the first nine months. We expect to pay a total of approximately $179,000$164,000 in benefit payments from our general assets during the remainder of fiscal 20192020 to fund SRIP and SERP payments.
12.12. Earnings Per Share
We refer you to the discussion of Earnings Per Share in Note 1.2. Summary of Significant Accounting Policies, in the financial statements included in our 20182019 Annual Report, for additional information concerning the calculation of earnings per share.
All stock awards are designed to encourage retention and to provide an incentive for increasing shareholder value. We have issued restricted stock awards to non-employee members of the board of directors since 2006 and to certain non-executive employees since 2014. We have issued restricted stock units (“RSUs”) to certain senior executives since fiscal 2012 under the Company’s Stock Incentive Plan. Each RSU entitles an executive to receive one share of the Company’s common stock if the executive remains continuously employed with the Company through the end of a three-year service period. The RSUs may be paid in shares of our common stock, cash or both at the discretion of the Compensation Committee of our board of directors. We have issued Performance-based Restricted Stock Units (“PSUs”) to certain senior executives since fiscal 2019 under the Company’s Stock Incentive Plan. Each PSU entitles the executive officer to receive one share of our common stock based on the achievement of two specified performance conditions if the executive officer remains continuously employed through the end of the three-year performance period. One target is based on our annual average growth in our EPS over the performance period and the other target is based on EPS growth over the performance period compared to our peers. The payout or settlement of the PSUs will be made in shares of our common stock.
We expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs and PSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:
October 28, | January 28, | November 3, | February 3, | |||||||||||||
2018 | 2018 | 2019 | 2019 | |||||||||||||
Restricted shares | 22 | 16 | 49 | 22 | ||||||||||||
Restricted stock units | 14 | 19 | ||||||||||||||
RSUs and PSUs | 78 | 36 | ||||||||||||||
36 | 35 | 127 | 58 |
The number of outstanding restricted shares increased due primarily to grants of restricted shares to a larger population of our non-executive employees as an incentive for retention and alignment of individual performance to our values. The number of RSUs and PSUs increased primarily due to the addition of three additional executive officers in the second quarter of fiscal 2019.
All restricted shares, RSUs and RSUsPSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 28, | October 29, | October 28, | October 29, | |||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 9,332 | $ | 7,202 | $ | 25,181 | $ | 19,726 | ||||||||
Less: Unvested participating restricted stock dividends | 3 | 2 | 8 | 8 | ||||||||||||
Net earnings allocated to unvested participating restricted stock | 17 | 10 | 41 | 37 | ||||||||||||
Earnings available for common shareholders | 9,312 | 7,190 | 25,132 | 19,681 | ||||||||||||
Weighted average shares outstanding for basic earnings per share | 11,763 | 11,679 | 11,758 | 11,596 | ||||||||||||
Dilutive effect of unvested restricted stock and RSU awards | 15 | 21 | 20 | 30 | ||||||||||||
Weighted average shares outstanding for diluted earnings per share | 11,778 | 11,700 | 11,778 | 11,626 | ||||||||||||
Basic earnings per share | $ | 0.79 | $ | 0.62 | $ | 2.14 | $ | 1.70 | ||||||||
Diluted earnings per share | $ | 0.79 | $ | 0.61 | $ | 2.13 | $ | 1.69 |
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
November 3, | October 28, | November 3, | October 28, | |||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 3,920 | $ | 9,332 | $ | 10,067 | $ | 25,181 | ||||||||
Less: Unvested participating restricted stock dividends | 7 | 3 | 18 | 8 | ||||||||||||
Net earnings allocated to unvested participating restricted stock | 16 | 17 | 33 | 41 | ||||||||||||
Earnings available for common shareholders | 3,897 | 9,312 | 10,016 | 25,132 | ||||||||||||
Weighted average shares outstanding for basic earnings per share | 11,789 | 11,763 | 11,782 | 11,758 | ||||||||||||
Dilutive effect of unvested restricted stock, RSU and PSU awards | 27 | 15 | 39 | 20 | ||||||||||||
Weighted average shares outstanding for diluted earnings per share | 11,816 | 11,778 | 11,821 | 11,778 | ||||||||||||
Basic earnings per share | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.14 | ||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.79 | $ | 0.85 | $ | 2.13 |
13.13. Income Taxes
We recorded income tax expense of $2.8$1.1 million for the fiscal 20192020 third quarter compared to $4.0$2.8 million for the comparable prior year period. The effective tax rates for the fiscal 20192020 and 20182019 third quarters were 22.9%21.4% and 35.7%22.9%, respectively. The effective tax rates for the first nine months of fiscal 2020 and 2019 were 21.9% and 2018 were 23.0% and 34.9%, respectively. Our effective tax rate was lower in the fiscal 2019 third quarter and first nine months as a result of the recently enacted Tax Cuts and Jobs Act, partially offset by increased state income taxes. We adopted ASU 2014-09 and 2018-02 in the first quarter of fiscal 2019. The adoptions resulted in the reclassification of $120,000 from federal tax payable and $111,000 from Accumulated Other Comprehensive Income, both to retained earnings..
The net unrecognized tax benefits as of October 28, 2018November 3, 2019 and January 28, 2018,February 3, 2019, which, if recognized, would affect our effective tax rate are $82,000$40,000 and $80,000,$38,000, respectively.
Tax years ending January 31, 2016 through February 1, 2015 through January 28, 20183, 2019 remain subject to examination by federal and state taxing authorities.
14. 14. Segment Information
As a public reporting entity, we are required to present disaggregated information by segment using the management approach. The objective of this approach is to allow users of our financial statements to see our business through the eyes of management based upon the way management reviews performance and makes decisions. The management approach requires segment information to be reported based on how management internally evaluates the operating performance of the company’s business units or segments. The objective of this approach is to meet the basic principles of segment reporting as outlined in ASC 280 Segments (“ASC 280”), which are to allow the users of our financial statements to:
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We define our segments as those operations our chief operating decision maker (“CODM”) regularly reviews to analyze performance and allocate resources. We measure the results of our segments using, among other measures, each segment’s net sales, gross profit and operating income, as determined by the information regularly reviewed by the CODM.
We continually monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. In the fourth quarter of fiscal 2018, we updated our reportable segments as follows: Hooker Upholstery was aggregated with Hooker Casegoods and reported as the Hooker Branded segment. The domestic upholstery operations of Shenandoah Furniture, Sam Moore and Bradington-Young were moved into All Other with the Company’s H Contract business and the remains of the Company’s Homeware division, which was shuttered earlier in fiscal 2018. The Home Meridian segment remains unchanged. Therefore, forFor financial reporting purposes, we are organized into two reportable segments and “All Other”, which includes the remainder of our businesses:
■ | Hooker Branded, consisting of the operations of our imported Hooker Casegoods and Hooker Upholstery businesses; |
■ | Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; and |
■ | All Other, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore, |
The following table presents segment information for the periods, and as of the dates, indicated:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | October 28, 2018 | October 29, 2017 | November 3, 2019 | October 28, 2018 | November 3, 2019 | October 28, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
% Net | % Net | % Net | % Net | % Net | % Net | % Net | % Net | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Sales | Sales | Sales | Sales | Sales | �� | Sales | Sales | Sales | Sales | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 46,479 | 27.1 | % | $ | 42,573 | 27.0 | % | $ | 129,801 | 26.9 | % | $ | 120,934 | 27.2 | % | $ | 43,703 | 27.6 | % | $ | 46,479 | 27.1 | % | $ | 122,707 | 27.5 | % | $ | 129,801 | 26.9 | % | ||||||||||||||||||||||||||||||||
Home Meridian | 95,013 | 55.4 | % | 92,068 | 58.3 | % | 266,631 | 55.2 | % | 262,173 | 58.9 | % | 85,776 | 54.3 | % | 95,013 | 55.4 | % | 240,594 | 54.0 | % | 266,631 | 55.2 | % | ||||||||||||||||||||||||||||||||||||||||
All Other | 29,982 | 17.5 | % | 23,293 | 14.7 | % | 86,594 | 17.9 | % | 62,007 | 13.9 | % | 28,697 | 18.1 | % | 29,982 | 17.5 | % | 82,641 | 18.5 | % | 86,594 | 17.9 | % | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 171,474 | 100.0 | % | $ | 157,934 | 100.0 | % | $ | 483,026 | 100.0 | % | $ | 445,114 | 100.0 | % | $ | 158,176 | 100.0 | % | $ | 171,474 | 100.0 | % | $ | 445,942 | 100.0 | % | $ | 483,026 | 100.0 | % | ||||||||||||||||||||||||||||||||
Gross Profit | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 14,334 | 30.8 | % | $ | 13,096 | 30.8 | % | $ | 41,372 | 31.9 | % | $ | 38,177 | 31.6 | % | $ | 13,947 | 31.9 | % | $ | 14,334 | 30.8 | % | $ | 38,323 | 31.2 | % | $ | 41,372 | 31.9 | % | ||||||||||||||||||||||||||||||||
Home Meridian | 15,382 | 16.2 | % | 15,808 | 17.2 | % | 43,196 | 16.2 | % | 42,875 | 16.4 | % | 7,286 | 8.5 | % | 15,382 | 16.2 | % | 24,139 | 10.0 | % | 43,196 | 16.2 | % | ||||||||||||||||||||||||||||||||||||||||
All Other | 6,120 | 20.4 | % | 5,374 | 23.1 | % | 18,879 | 21.8 | % | 14,486 | 23.4 | % | 7,166 | 25.0 | % | 6,120 | 20.4 | % | 20,279 | 24.5 | % | 18,879 | 21.8 | % | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 35,836 | 20.9 | % | $ | 34,278 | 21.7 | % | $ | 103,447 | 21.4 | % | $ | 95,538 | 21.5 | % | $ | 28,399 | 18.0 | % | $ | 35,836 | 20.9 | % | $ | 82,741 | 18.6 | % | $ | 103,447 | 21.4 | % | ||||||||||||||||||||||||||||||||
Operating Income | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 5,712 | 12.3 | % | $ | 4,964 | 11.7 | % | $ | 17,381 | 13.4 | % | $ | 15,047 | 12.4 | % | $ | 6,188 | 14.2 | % | $ | 5,712 | 12.3 | % | $ | 15,453 | 12.6 | % | $ | 17,381 | 13.4 | % | ||||||||||||||||||||||||||||||||
Home Meridian | 4,829 | 5.1 | % | 4,637 | 5.0 | % | 10,168 | 3.8 | % | 10,748 | 4.1 | % | (3,955 | ) | -4.6 | % | 4,829 | 5.1 | % | (9,013 | ) | -3.7 | % | 10,168 | 3.8 | % | ||||||||||||||||||||||||||||||||||||||
All Other | 1,720 | 5.7 | % | 1,735 | 7.4 | % | 5,960 | 6.9 | % | 4,706 | 7.6 | % | 2,760 | 9.6 | % | 1,720 | 5.7 | % | 7,227 | 8.7 | % | 5,960 | 6.9 | % | ||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 12,261 | 7.2 | % | $ | 11,336 | 7.2 | % | $ | 33,509 | 6.9 | % | $ | 30,501 | 6.9 | % | $ | 4,993 | 3.2 | % | $ | 12,261 | 7.2 | % | $ | 13,667 | 3.1 | % | $ | 33,509 | 6.9 | % | ||||||||||||||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 350 | $ | 268 | $ | 699 | $ | 1,259 | $ | 89 | $ | 350 | $ | 600 | $ | 699 | ||||||||||||||||||||||||||||||||||||||||||||||||
Home Meridian | 143 | 580 | 330 | 1,090 | 126 | 143 | 300 | 330 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All Other | 1,138 | 145 | 1,435 | 359 | 871 | 1,138 | 3,845 | 1,435 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 1,631 | $ | 993 | $ | 2,464 | $ | 2,708 | $ | 1,086 | $ | 1,631 | $ | 4,745 | $ | 2,464 | ||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation & Amortization | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 984 | $ | 490 | $ | 1,479 | $ | 1,452 | $ | 471 | $ | 984 | $ | 1,453 | $ | 1,479 | ||||||||||||||||||||||||||||||||||||||||||||||||
Home Meridian | 851 | 673 | 1,795 | 2,012 | 549 | 851 | 1,627 | 1,795 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
All Other | 1,248 | 539 | 2,284 | 935 | 768 | 1,248 | 2,180 | 2,284 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 3,083 | $ | 1,702 | $ | 5,558 | $ | 4,399 | $ | 1,788 | $ | 3,083 | $ | 5,260 | $ | 5,558 |
As of November 3, | As of February 3, | |||||||||||||||||||||||||||||||
2019 | %Total | 2019 | %Total | |||||||||||||||||||||||||||||
Identifiable Assets | Assets | Assets | ||||||||||||||||||||||||||||||
Hooker Branded | $ | 140,920 | 42.9 | % | $ | 108,445 | 36.9 | % | ||||||||||||||||||||||||
Home Meridian | 146,971 | 44.8 | % | 144,277 | 49.1 | % | ||||||||||||||||||||||||||
All Other | 40,525 | 12.3 | % | 41,181 | 14.0 | % | ||||||||||||||||||||||||||
Consolidated | $ | 328,416 | 100.0 | % | $ | 293,903 | 100.0 | % | ||||||||||||||||||||||||
Consolidated Goodwill and Intangibles | 74,025 | 75,813 | ||||||||||||||||||||||||||||||
Total Consolidated Assets | $ | 402,441 | $ | 369,716 |
Sales by product type are as follows:
Net Sales (in thousands) | ||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||
November 3, 2019 | %Total | October 28, 2018 | %Total | November 3, 2019 | %Total | October 28, 2018 | %Total | |||||||||||||||||||||||||
Casegoods | $ | 105,018 | 66 | % | $ | 108,584 | 63 | % | $ | 288,470 | 65 | % | $ | 304,370 | 63 | % | ||||||||||||||||
Upholstery | 53,158 | 34 | % | 62,890 | 37 | % | 157,472 | 35 | % | 178,656 | 37 | % | ||||||||||||||||||||
$ | 158,176 | 100 | % | $ | 171,474 | 100 | % | $ | 445,942 | 100 | % | $ | 483,026 | 100 | % |
15. Subsequent Events
Dividends
On December 5, 2019, our board of directors declared a quarterly cash dividend of $0.16 per share, an increase of 6.7% or $0.01 per share, payable on December 30, 2019 to shareholders of record at December 16, 2019.
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| 2018 |
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| 2018 |
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Identifiable Assets |
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| Assets |
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Hooker Branded |
| $ | 135,060 |
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| 47.6 | % |
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| $ | 129,986 |
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| 47.8 | % |
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Home Meridian |
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| 109,725 |
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| 38.7 | % |
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| 107,139 |
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| 39.6 | % |
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All Other |
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| 39,088 |
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| 13.8 | % |
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| 34,394 |
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| 12.6 | % |
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Consolidated |
| $ | 283,873 |
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| 100.0 | % |
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| $ | 271,519 |
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Consolidated Goodwill and Intangibles |
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| 76,409 |
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| 78,197 |
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Total Consolidated Assets |
| $ | 360,282 |
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| $ | 349,716 |
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Sales by product type are as follows:
Net Sales (in thousands) | ||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||
October 28, 2018 | %Total | October 29, 2017 | %Total | October 28, 2018 | %Total | October 29, 2017 | %Total | |||||||||||||||||||||||||
Casegoods | $ | 108,584 | 63 | % | $ | 109,583 | 69 | % | $ | 304,370 | 63 | % | $ | 315,415 | 71 | % | ||||||||||||||||
Upholstery | 62,890 | 37 | % | 48,351 | 31 | % | 178,656 | 37 | % | 129,699 | 29 | % | ||||||||||||||||||||
$ | 171,474 | 100 | % | $ | 157,934 | 100 | % | $ | 483,026 | 100 | % | $ | 445,114 | 100 | % |
15. Subsequent Events
Dividends
On December 6, 2018, our board of directors declared a quarterly cash dividend of $0.15 per share, representing an increase of 7.1% or $0.01 per share, payable on December 31, 2018 to shareholders of record at December 17, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All references to the “Company,” “we,” “us” and “our” in this document refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to segment information. All references to the “Hooker,” “Hooker Division,” “Hooker Brands” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Branded segment and All Other which includes Bradington-Young, Sam Moore, Shenandoah Furniture and H Contract.
References to the “Shenandoah acquisition” refer to the acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017. Except for one-month of Shenandoah’s prior-year results (September 29, 2017 through the end of our fiscal 2018 third quarter ended on October 29, 2017), comparable prior-year information for Shenandoah is not included in the financial statements presented in this report. References to the “HMI acquisition” refer to the acquisition of substantially all of the assets of Home Meridian International, Inc. on February 1, 2016.
Forward-Looking Statements
Certain statements made in this report, including statements under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements. These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the negatives thereof, or other variations thereof, or comparable terminology, or by discussions of strategy. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Those risks and uncertainties include but are not limited to:
■ | general economic or business conditions, both domestically and internationally, and instability in the financial and credit markets, including their potential impact on our (i) sales and operating costs and access to financing or (ii) customers and suppliers and their ability to obtain financing or generate the cash necessary to conduct their respective businesses; |
■ | adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, such as the current U.S. administration imposing a |
■ | sourcing transitions away from China, including the lack of adequate manufacturing capacity and skilled labor and longer lead times, due to competition and increased demand for resources in those countries; |
■ | 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; |
■ | the risks specifically related to the concentrations of a material part of our sales and accounts receivable in only a few customers; |
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■ | our inability to collect amounts owed to us; |
■ | disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships; |
■ | the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the |
■ | disruptions and damage (including due to weather) affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices or warehouses in Vietnam and China; |
■ | achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations; |
■ | risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods, |
■ | higher than expected employee medical and workers’ compensation costs that may increase the cost of our high-deductible healthcare and workers compensation plans; |
■ | our ability to successfully implement our business plan to increase sales and improve financial performance; |
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■ | the possible impairment of our long-lived assets, which can result in reduced earnings and net worth; |
■ | the cost and difficulty of marketing and selling our products in foreign markets; |
■ | price competition in the furniture industry; |
■ | difficulties in forecasting demand for our imported products; |
■ | changes in domestic and international monetary policies and fluctuations in foreign currency exchange rates affecting the price of our imported products and raw materials; |
■ | the cyclical nature of the furniture industry, which is particularly sensitive to changes in consumer confidence, the amount of consumers’ income available for discretionary purchases, and the availability and terms of consumer credit; |
■ | risks associated with domestic manufacturing operations, including fluctuations in capacity utilization and the prices and availability of key raw materials, as well as changes in transportation, warehousing and domestic labor costs, availability of skilled labor, and environmental compliance and remediation costs; |
■ | risks associated with distribution through third-party retailers, such as non-binding dealership arrangements; |
■ | capital requirements and costs, including the servicing of our floating-rate term loans; |
■ | competition from non-traditional outlets, such as internet and catalog retailers; and |
■ | changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, |
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Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.
Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 20182019 annual report on Form 10-K (the “2018“2019 Annual Report”) and in this quarterly report on Form 10-Q..
Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.
This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began July 30,August 5, 2019, and the thirty-nine week period (also referred to as “nine months,” “nine-month period” or “first nine months”“year-to-date period”) that began January 29, 2018,February 4, 2019, which both ended October 28, 2018.November 3, 2019. This report discusses our results of operations for this period compared to the 20182019 fiscal year thirteen-week period that began July 31, 201730, 2018 and the thirty-nine weekthirty-nine-week period that began January 30, 2017,29, 2018, which both ended October 29, 2017;28, 2018; and our financial condition as of October 28, 2018November 3, 2019 compared to January 28, 2018.February 3, 2019.
References in this report to:
■ | the 2020 fiscal year and comparable terminology mean the fiscal year that began February 4, 2019 and will end February 2, 2020; and |
■ | the 2019 fiscal year and comparable terminology mean the fiscal year that began January 29, 2018 and |
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Dollar amounts presented in the tables below are in thousands except for per share data.
The following discussion should be read in conjunction with the condensed consolidated financial statements, including the related notes, contained elsewhere in this quarterly report. We also encourage users of this report to familiarize themselves with all of our recent public filings made with the Securities and Exchange Commission (“SEC”), especially our 20182019 Annual Report. Our 20182019 Annual Report contains critical information regarding known risks and uncertainties that we face, critical accounting policies and information on commitments and contractual obligations that are not reflected in our condensed consolidated financial statements, as well as a more thorough and detailed discussion of our corporate strategy and new business initiatives.
Our 20182019 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.
Overview
Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), and leather 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. Our net sales are derived from the sale of home furnishings, as well as hospitality and contract furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 20172018 shipments to U.S. retailers, according to a 20182019 survey by a leading trade publication.
We believe that consumer home furnishings purchasestastes and channels in which they shop for furniture are impacted by an array of factors, including general economic conditions (such as consumer confidence, availability of consumer credit, energyevolving at a rapid pace and other commodity prices), and housing and mortgage markets. These purchases are also impacted by lifestyle-driven factors such as changes in fashion trends, disposable income, household formation and turnover, as well as competition with other discretionary purchases. Hospitality furniture sales are driven primarily by new hotel construction and hotel remodeling activity, which is linkedwe continue to the strength of the overall economy, including business and personal spending levels. Contract furniture sales are driven largely by senior living facility construction and remodeling activity, which is linkedchange to the number of consumers entering retirement, which is partially related to the strength of the overall economy, including stock market performance.meet these demands.
Approximately 87% of our fiscal 2018 sales were of imported furniture products, primarily from Asia. Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers, such as duties and tariffs, diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. Our domestic upholstery operations have significantly higher overhead and fixed costs than our import operations, and their profitability can be and has been adversely affected by economic downturns.
Our strategy is to leverage the financial strength afforded us by ourHooker’s slower-growing but highly profitable traditional Hooker divisionsbusinesses in order to boost revenues and earnings both organically and by acquiring businessescompanies selling in faster-growing channels of distribution in which our legacytraditional businesses are under-represented. Consequently, Hooker acquired the businessesbusiness of Home Meridian on February 1, 2016 and Shenandoah Furniture on September 29, 2017.
Hooker’sWe believe our acquisition of the business of Home Meridian has better positioned us in some of the fastest growing and emergingadvantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels of distribution, althoughtend to operate at lower margins. This acquisition has provided the Home Meridian segment’s current leadership team with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.
Hooker’sWe also believe our acquisition of the business of Shenandoah Furniture, a North Carolina-based domestic upholsterer has better positioned us in the “lifestyle specialty” retail distribution channel, which we believe is gaining market share and doing well with multiple demographic groups.channel. For that channel, domestically-produced,domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.
Executive Summary-ResultsSummary-Results of Operations
The Shenandoah acquisition closed during the third quarter of fiscal 2018. Consequently, All Other’s prior year results only included one-month of Shenandoah’s results beginning on September 29, 2017 through the end of our fiscal 2018 third quarter ended on October 29, 2017.
Consolidated net sales for fiscal 20192020 third quarter increased $13.5decreased $13.3 million or 8.6%7.8% as compared to the prior year period, from $171.5 million to $171.5$158.2 million due primarily to the inclusion of Shenandoah’s$9.2 million or 9.7% net sales fordecrease in the full quarter,Home Meridian segment, and to a $3.9 million or 9.2%lesser extent net sales increasedecreases in the Hooker Branded segment and a $2.9All Other of $2.8 million or 3.2% net sales increase at the Home Meridian segment in the third quarter.and $1.3 million, respectively.
For the fiscal 2019 first nine months of fiscal 2020, consolidated net sales increased $37.9decreased $37.1 million or 8.5% to7.7% from $483.0 million primarilyto $445.9 million as compared to the prior year period due to sales increasesdecreases in both of our reportable segments as well as All Other and inOther. Home Meridian segment net sales declined by $26.0 million or 9.8%, the Hooker Branded segment.segment net sales decreased $7.1 million or 5.5% and All Other grew net sales by approximately 40% and contributed $24.6decreased $4.0 million or 4.6%, all as compared to the consolidatedfiscal 2019 nine-month period.
Consolidated net sales increase mostly due to the addition of Shenandoah business. The Hooker Branded segment’s net sales increased $8.9income decreased $5.4 million or 7.3%58.0% and $15.1 million or 60.0%, as compared to the prior year first nine months. Home Meridian segment net sales increased $4.5 million or 1.7% in the fiscal 2019 first nine months.
Consolidated net income increased $2.1 million or 29.6% in the third quarter and $5.5 million or 27.7% in the first nine months, as compared to the prior year periods, respectively. The increase was attributable to higher earnings on increased sales, as well as the tax rate reduction due to the recently enacted Tax Cuts and Jobs Act
As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 20192020 third quarter and first nine months results of operations:
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Review
Net sales increased in both reportable segments and in All Other for both the fiscalOur lower third quarter sales and earnings were disappointing. They were impacted significantly by higher chargebacks and reduced volume from a single large retail customer in our Home Meridian segment. The lingering effects of 25% tariffs on finished goods and component parts imported from China, along with spotty retail demand that has continued through the first nine months.months of the year, also negatively affected our performance.
NetThe sales growthdecline with the single major customer represented 70% of a $9 million volume reduction at the Home Meridian segment, and approximately $3 million in All Otherchargebacks from the same retailer drove a $4.0 million operating loss for both the quarterlyquarter in the segment. That compares to operating income of about $5 million at Home Meridian in the same quarter a year ago. Several other factors also negatively affected Home Meridian’s current quarter results including about $600,000 in demurrage costs due to excess inventory that we added in anticipation of increased sales, and year-to-date fiscal periods was mostly attributable$450,000 in costs to the inclusion of Shenandoah’s net sales, as well as over 10% net sales growth at Bradington-Youngstore that inventory and additional excess inventory due to quality-related customer returns from a major customer last year. We also wrote that inventory down by $650,000 to market value during the quarter to increase the rate of sale. Additionally, Home Meridian incurred about $200,000 in start-up costs for HMIdea during the current quarter. These costs were partially offset by a $520,000 gain on the settlement of our pension plan during the quarter, recorded in other income.
On a more positive note, Home Meridian’s hospitality and 7%e-commerce sales continued to grow. Samuel Lawrence Hospitality’s (“SLH”) net sales growth duringincreased over 30% for the first nine months. With solid sales of luxury motion products, Bradington-Young incoming orders increased about 6%months and ended the quarter with backlog was over 30%27% higher than the prior year quarter. Salesperiod and is expected to continue to grow. Home Meridian has also launched a new division, HMidea, which will offer better-quality, ready-to-assemble furniture to mass marketers and e-commerce customers. HMidea’s initial launch was well received at Sam Moore continuedthe October High Point Furniture Market and the line is expected continue to run below prior year for both the quarterly and nine-month periods. However, better controlled labor costs and S&A expenses improved Sam Moore gross and operating margins. Incoming orders at Sam Moore decreased 3.8% in the third quarter, but its quarter-end backlog was 27.4% higher than prior year period, suggesting that sales will improvegrow in the coming months.
Percentage-wise, sales in Hooker Branded and All upholstery units experienced a negative impact on margins from price increasesOther were down in materialsthe mid-to-low single digits, respectively, and components such as foam, plywoodgross profits and steel and we experienced a lag between those cost increases and our own price increases to customers. Higher employee medical costs, particularly at the Bradington-Young and Shenandoah divisions, have also negatively affected margins. Although a smaller part of our business, H Contract continues to develop new product to broaden product offerings and become a more relevant supplieroperating income improved compared to the industry. Incoming orders were up 7.8%prior year third quarter as a percentage of net sales. The impact of 25% tariffs on imported furniture from China enacted this summer has generally resulted in a 10% price increase on the portion of the Company’s product line imported from China in the quarterHooker Branded segment, suppressing retail demand. In total, given the challenging retail environment and quarter-end backlog up over 26% over the same period last year.continued impact of tariffs, we were gratified to improve profitability performance in the Hooker Branded segment and All Other. The Hooker Branded Segment achieved a 190-basis-point improvement in operating income margin, and All Other achieved a 390-basis-point improvement compared to prior year third quarter.
The Hooker Branded segment’s net sales increased over 9%decreased $2.8 million or 6.0% in the fiscal 2020 third quarter, driven by our focus on advantaged channels of distribution, strong product lines and in-stock positions on best-sellers. Higherdue to a net sales were drivendecrease in the Hooker Casegoods division, partially offset by highera net sales increase at Hooker Upholstery. Hooker Casegoods experienced reduced incoming orders and good in-stock positions, which ledlower sales volume driven by lower consumer demand and softness in the home furnishings industry. Volume loss was partially mitigated by higher average selling prices as we adjusted pricing to solid shippingmitigate increased product costs and excess tariffs. Hooker Upholstery continued to grow net sales and gross profit, both in the double digits, due to broader product offerings and favorable product mix with more higher-priced sofas and sectionals sold. Hooker Upholstery’s incoming orders increased over 10% compared to fiscal 2019 third quarter.
Our sourcing transitions to non-tariff countries are on schedule. Company-wide, we expect to reduce the portion of our overall product line imported from China from about 40% at the end of our most recent fiscal year to approximately 22% by this fiscal year end, with further progress expected in fiscal 2021.
Net sales in All Other decreased $1.3 million or 4.3% in the fiscal 2020 third quarter due to sales declines at Bradington –Young and Sam Moore, driven by decreased incoming orders, partially offset by continued strong sales in H Contract division and a lower-single digit sales increase at Shenandoah. Despite net sales declines, three out of four divisions improved gross margin in the third quarter, benefiting from lower material costs and better cost containment, partially offset by operating inefficiencies and higher direct labor due to lower production volume in the third quarter. Year-to-date, Hooker Branded segment’s net sales increased 7.3%.
The Home Meridian segment grew net sales by $2.9 million or 3.2%However, favorable material costs have leveled out and we do not expect additional decreases in the third quarter. Increased net sales in the second and third quarters have now fully recovered from the sales miss due to disruptions with its Asian suppliers in the first quarter. Fiscal 2019 first nine months net sales were up $4.5 million or 1.7% compared to prior year period. The Home Meridian operating segment’s hospitality business unit had another strong quarter, withnear future. H Contract incoming orders increased hotel projects and the continued success of a new product line launched earlier this year, growing sales by over 50%15% in the third quarter and 40% in the first nine months, respectively, compared to prior year periods. The business unit finished the third quarter with a backlog two timesover 20% higher than the comparable prior year period last year. Ecommercequarter end. Broader product offerings and favorable product mix with heavier weighting of imported casegoods significantly improved H Contract net sales continued to grow in both periods increasing 55% % duringand profitability. All Other reported a solid operating income margin of 9.6% and 8.7% for the fiscal 2020 third quarter and over 30% in the nine-month period,year to date, respectively. These sales increases were partially offset by decreased sales to major chains and club accounts. Overall, the Home Meridian segment’s incoming orders increased 32% in the third quarter, with a backlog 21.5% higher than prior year third quarter.
Sales of furniture imported from China comprised approximately 40% of our fiscal 2018 net sales. On September 24, 2018, a 10% tariff was imposed on almost all furnitureCash and furniture components imported from China. We respondedcash equivalents increased $13.1 million to the tariffs with a combination of price increases on certain imported Chinese furniture products and vendor price concessions. We do not believe the price increases negatively impacted sales in the$24.5 million compared to $11.4 million at fiscal 2019 third quarter. Hooker Branded segment product costs were not materially impacted by the tariff during the quarter because the tariff did not begin until late in the third quarter. Increased freight costsyear-end, principally due to increased demand for shipping capacity aheadcustomer deposits in Home Meridian’s hospitality division and the collection of the onset of tariffs negatively affected the Home Meridian segment’s freight costs during the quarter.
Our nine-monthaccounts receivable. Despite disappointing operating results also benefited from $1.0 million gains on Company-owned life insurance recordedthus far in the first quarter, the absence of $700,000 Shenandoah-acquisition related costs and lower bad debt expense due to the absence of a write-off of a customer balance in the prior year, partially offset by the $500,000 casualty loss in the Hooker Branded segment recorded in the fiscal 2019 second quarter. In addition to our operating results,2020, we generated almost $21$26.6 million in cash from operating activities despiteand $1.4 million from proceeds received on a $3 million cash contribution to our Pension Plan,note receivable from the sale of a former distribution facility. In addition, we paid about $16 million towards our term loans, including a $10 million unscheduled payment and paid approximately $5$5.3 million in cash dividends to our shareholders. Cashshareholders, $4.7 million for capital expenditures to expand our manufacturing facilities, and cash equivalents stood at $29.4$4.4 million at quarter-end, closetowards our term loans. Our total assets and liabilities as of November 3, 2019 each increased approximately $41 million due to the balance atadoption of Topic 842, Leases on the endfirst day of the 2018current fiscal year. Profitability, along withWe are working to reduce excess inventory and exited one of the temporary warehouses early in the fiscal 2020 fourth quarter. With strategic inventory management and cautious capital expenditures, have helped us maintainalong with an aggregate $25.7 million available under our strong, stable balance sheets.existing revolving credit facility to fund working capital, we are confident in our financial condition going forward.
Results of Operations
The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||
October 28, | October 29, | October 28, | October 29, | November 3, | October 28, | November 3, | October 28, | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||
Cost of sales | 79.1 | 78.3 | 78.5 | 78.5 | 82.0 | 79.1 | 81.4 | 78.5 | ||||||||||||||||||||||||
Casualty loss | - | - | - | 0.1 | ||||||||||||||||||||||||||||
Total cost of sales | 82.0 | 79.1 | 81.4 | 78.6 | ||||||||||||||||||||||||||||
Gross profit | 20.9 | 21.7 | 21.4 | 21.5 | 18.0 | 20.9 | 18.6 | 21.4 | ||||||||||||||||||||||||
Selling and administrative expenses | 13.4 | 14.1 | 14.1 | 14.3 | 14.4 | 13.4 | 15.1 | 14.1 | ||||||||||||||||||||||||
Intangible asset amortization | 0.3 | 0.4 | 0.4 | 0.3 | 0.4 | 0.3 | 0.4 | 0.4 | ||||||||||||||||||||||||
Operating income | 7.2 | 7.2 | 6.9 | 6.9 | 3.2 | 7.2 | 3.1 | 6.9 | ||||||||||||||||||||||||
Other income, net | 0.1 | 0.1 | 0.1 | 0.2 | 0.2 | 0.1 | - | 0.1 | ||||||||||||||||||||||||
Interest expense, net | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||||||||||||||
Income before income taxes | 7.1 | 7.1 | 6.8 | 6.8 | 3.2 | 7.1 | 2.9 | 6.8 | ||||||||||||||||||||||||
Income tax expense | 1.6 | 2.5 | 1.6 | 2.4 | 0.7 | 1.6 | 0.6 | 1.6 | ||||||||||||||||||||||||
Net income | 5.4 | 4.6 | 5.2 | 4.4 | 2.5 | 5.4 | 2.3 | 5.2 |
Fiscal 20192020 Third Quarter Compared to Fiscal 20182019 Third Quarter
Net Sales | Net Sales | |||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 46,479 | 27.1 | % | $ | 42,573 | 27.0 | % | $ | 3,906 | 9.2 | % | $ | 43,703 | 27.6 | % | $ | 46,479 | 27.1 | % | $ | (2,776 | ) | -6.0 | % | |||||||||||||||||||||||
Home Meridian | 95,013 | 55.4 | % | 92,068 | 58.3 | % | 2,945 | 3.2 | % | 85,776 | 54.3 | % | 95,013 | 55.4 | % | (9,237 | ) | -9.7 | % | |||||||||||||||||||||||||||||
All Other | 29,982 | 17.5 | % | 23,293 | 14.7 | % | 6,689 | 28.7 | % | 28,697 | 18.1 | % | 29,982 | 17.5 | % | (1,285 | ) | -4.3 | % | |||||||||||||||||||||||||||||
Consolidated | $ | 171,474 | 100 | % | $ | 157,934 | 100 | % | $ | 13,540 | 8.6 | % | $ | 158,176 | 100 | % | $ | 171,474 | 100 | % | $ | (13,298 | ) | -7.8 | % |
Unit Volume |
| FY19 Q3 % Increase vs. FY18 Q3 |
| Average Selling Price (ASP) |
| FY19 Q3 % Increase vs. FY18 Q3 | FY20 Q3 % Increase vs. FY19 Q3 | Average Selling Price (ASP) | FY20 Q3 % Increase vs. FY19 Q3 | |||||||
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Hooker Branded |
| 16.6% |
| Hooker Branded |
| -7.1% | -21.1 | % | Hooker Branded | 19.7 | % | |||||
Home Meridian |
| -1.3% |
| Home Meridian |
| 3.6% | -4.7 | % | Home Meridian | -1.7 | % | |||||
All Other* |
| -6.9% |
| All Other* |
| 7.7% | ||||||||||
All Other | -11.2 | % | All Other | 6.7 | % | |||||||||||
Consolidated |
| 0.7% |
| Consolidated |
| 2.9% | -7.5 | % | Consolidated | 1.7 | % |
*Shenandoah is excluded from All OtherConsolidated net sales decreased primarily due to sales decline in the Unit VolumeHome Meridian segment and ASP tables above since only one month of its results was includedto a lesser extent in our fiscal 2018 third quarter. Consequently, we believe including its fiscal 2019 third quarter results would skewthe Hooker Branded segment and All Other’s results and reduce the usefulness of the table above.Other.
■ | The net sales decrease in the Hooker Branded segment was due to a sales decrease in Hooker Casegoods while partially offset by continued sales growth in Hooker Upholstery. The sales decline was attributable to decreased unit volume, partially offset by increased ASP, which was due to price increases necessitated by the imposition of tariffs on goods imported from China and higher freight costs, as well as increased sales of higher-priced products by Hooker Upholstery. |
■ | Net sales decreased in the Home Meridian segment due to sales volume loss with club accounts and higher quality chargebacks from a large customer, partially offset by increased volume in Pulaski Furniture and Samuel Lawrence Furniture as their sales begin to return to normal, as well as in Accentrics Home business, which focuses on the growing e-commerce channels. ASP decreased in three out of five divisions but increased significantly at Samuel Lawrence Hospitality due to favorable product mix, and at PRI as the result of margin improvement efforts. |
■ | All Other net sales decreased due to reduced incoming orders at our domestic upholstery manufacturing divisions, partially offset by continued strong sales at H Contract. All Other ASP increased due primarily to increased sales of higher-priced products at Bradington-Young and Shenandoah. |
Gross Income and Margin | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 13,947 | 31.9 | % | $ | 14,334 | 30.8 | % | $ | (387 | ) | -2.7 | % | |||||||||||
Home Meridian | 7,286 | 8.5 | % | 15,382 | 16.2 | % | (8,096 | ) | -52.6 | % | ||||||||||||||
All Other | 7,166 | 25.0 | % | 6,120 | 20.4 | % | 1,046 | 17.1 | % | |||||||||||||||
Consolidated | $ | 28,399 | 18.0 | % | $ | 35,836 | 20.9 | % | $ | (7,437 | ) | -20.8 | % |
Consolidated net sales increased due to sales increases in both Hooker Branded and Home Meridian segments, and All Other. Net sales increased in All Other due primarily to the inclusion of Shenandoah net sales and solid sales growth at Bradington-Young, while partially offset by sales decrease at Sam Moore. All Other’s ASP increased due to increased sales of higher-priced Bradington-Young products. All Other’s unit volumes decreased primarily due to decreased sales volume at Sam Moore. Hooker Branded segment ASP decreased due to product mix and slightly increased discounting at Hooker Casegoods. The net sales increase at Hooker Branded segment was attributable to increased unit volume at Hooker Casegoods and Hooker Upholstery as well as increased ASP at Hooker Upholstery. Home Meridian segment ASP increased due to favorable customer allowances. Its unit volume decreased due to sales decline to major furniture chains, partially offset by sales increases at hospitality and emerging channels.
Gross Income and Margin | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 14,334 | 30.8 | % | $ | 13,096 | 30.8 | % | $ | 1,238 | 9.5 | % | ||||||||||||
Home Meridian | 15,382 | 16.2 | % | 15,808 | 17.2 | % | (426 | ) | -2.7 | % | ||||||||||||||
All Other | 6,120 | 20.4 | % | 5,374 | 23.1 | % | 746 | 13.9 | % | |||||||||||||||
Consolidated | $ | 35,836 | 20.9 | % | $ | 34,278 | 21.7 | % | $ | 1,558 | 4.5 | % |
Consolidated gross profit increaseddecreased in absolute terms but decreasedand as a percentage of net sales in the fiscal 20192020 third quarter.
■ | The Hooker Branded |
■ | The Home Meridian |
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Selling and Administrative Expenses (S&A) | Selling and Administrative Expenses (S&A) | |||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 8,623 | 18.6 | % | $ | 8,133 | 19.1 | % | $ | 490 | 6.0 | % | $ | 7,760 | 17.8 | % | $ | 8,623 | 18.6 | % | $ | (863 | ) | -10.0 | % | |||||||||||||||||||||||
Home Meridian | 10,219 | 10.8 | % | 10,837 | 11.8 | % | (618 | ) | -5.7 | % | 10,907 | 12.7 | % | 10,219 | 10.8 | % | 688 | 6.7 | % | |||||||||||||||||||||||||||||
All Other | 4,137 | 13.8 | % | 3,348 | 14.4 | % | 789 | 23.6 | % | 4,143 | 14.4 | % | 4,137 | 13.8 | % | 6 | 0.1 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 22,979 | 13.4 | % | $ | 22,318 | 14.1 | % | $ | 661 | 3.0 | % | $ | 22,810 | 14.4 | % | $ | 22,979 | 13.4 | % | $ | (169 | ) | -0.7 | % |
Consolidated selling and administrative (“S&A”)&A expenses increaseddecreased in absolute terms but decreasedincreased as a percentage of net sales in the fiscal 20192020 third quarter.
■ | Hooker Branded |
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■ | Home Meridian segment S&A expenses increased in absolute terms due primarily to increased wages related to the resourcing transition underway in Asia, increased professional services expenses due to higher compliance costs and consulting fees and start-up costs for the new HMIdea division. The increase in Home Meridian S&A expenses was partially offset by |
■ | All Other S&A expenses stayed flat in absolute terms and increased |
Intangible Asset Amortization | ||||||||||||||||||||||||
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October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 596 | 0.3 | % | $ | 624 | 0.4 | % | $ | (28 | ) | -4.5 | % |
Intangible Asset Amortization | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 596 | 0.4 | % | $ | 596 | 0.3 | % | $ | - | 0.0 | % |
Intangible asset amortization expense decreased instayed the current year quarter duesame compared to the absence of amortization expense on some shorter-lived Shenandoah acquisition-related intangible assets.prior year third quarter.
Operating Profit and Margin | Operating Profit (Loss) and Margin | |||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 5,712 | 12.3 | % | $ | 4,964 | 11.7 | % | $ | 748 | 15.1 | % | $ | 6,188 | 14.2 | % | $ | 5,712 | 12.3 | % | $ | 476 | 8.3 | % | ||||||||||||||||||||||||
Home Meridian | 4,829 | 5.1 | % | 4,637 | 5.0 | % | 192 | 4.1 | % | (3,955 | ) | -4.6 | % | 4,829 | 5.1 | % | (8,784 | ) | -181.9 | % | ||||||||||||||||||||||||||||
All Other | 1,720 | 5.7 | % | 1,735 | 7.4 | % | (15 | ) | -0.9 | % | 2,760 | 9.6 | % | 1,720 | 5.7 | % | 1,040 | 60.5 | % | |||||||||||||||||||||||||||||
Consolidated | $ | 12,261 | 7.2 | % | $ | 11,336 | 7.2 | % | $ | 925 | 8.2 | % | $ | 4,993 | 3.2 | % | $ | 12,261 | 7.2 | % | $ | (7,268 | ) | -59.3 | % |
Operating profitability increaseddecreased in absolute terms and was flat as a percentage of net sales, due to the factors discussed above.
Interest Expense, net | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 354 | 0.2 | % | $ | 327 | 0.2 | % | $ | 27 | 8.3 | % |
Interest Expense, net | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 316 | 0.2 | % | $ | 354 | 0.2 | % | $ | (38 | ) | -10.7 | % |
Consolidated interest expense increaseddecreased due to increases in thelower average loan balances, partially offset by increased interest rates on our variable-rate term loans, partially offset by the unscheduled $10 million debt payment made earlier in the fiscal year on the New Unsecured Term Loan.loans.
Income taxes | Income taxes | |||||||||||||||||||||||||||||||||||||||||||||||
Thirteen Weeks Ended | Thirteen Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Consolidated income tax expense | $ | 2,775 | 1.6 | % | $ | 4,006 | 2.5 | % | $ | (1,231 | ) | -30.7 | % | $ | 1,066 | 0.7 | % | $ | 2,775 | 1.6 | % | $ | (1,709 | ) | -61.6 | % | ||||||||||||||||||||||
Effective Tax Rate | 22.9 | % | 35.7 | % | 21.4 | % | 22.9 | % |
We recorded income tax expense of $2.8$1.1 million for the fiscal 20192020 third quarter compared to $4.0$2.8 million for the comparable prior year period. The effective tax rates for the fiscal 20192020 and 20182019 third quarters were 22.9%21.4% and 35.7%22.9%, respectively. Our effective tax rate
Net Income | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
Net Income | % Net Sales | % Net Sales | ||||||||||||||||||||||
Consolidated | $ | 3,920 | 2.5 | % | $ | 9,332 | 5.4 | % | $ | (5,412 | ) | -58.0 | % | |||||||||||
Diluted earnings per share | $ | 0.33 | $ | 0.79 |
Fiscal 2020 First Nine Months Compared to Fiscal 2019 First Nine Months
Net Sales | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 122,707 | 27.5 | % | $ | 129,801 | 26.9 | % | $ | (7,094 | ) | -5.5 | % | |||||||||||
Home Meridian | 240,594 | 54.0 | % | 266,631 | 55.2 | % | (26,037 | ) | -9.8 | % | ||||||||||||||
All Other | 82,641 | 18.5 | % | 86,594 | 17.9 | % | (3,953 | ) | -4.6 | % | ||||||||||||||
Consolidated | $ | 445,942 | 100 | % | $ | 483,026 | 100 | % | $ | (37,084 | ) | -7.7 | % |
Unit Volume | FY20 YTD % Increase vs. FY19 YTD | Average Selling Price (ASP) | FY20 YTD % Increase vs. FY19 YTD | |||||||
Hooker Branded | -14.0 | % | Hooker Branded | 10.5 | % | |||||
Home Meridian | -9.4 | % | Home Meridian | 1.1 | % | |||||
All Other | -9.8 | % | All Other | 5.5 | % | |||||
Consolidated | -10.0 | % | Consolidated | 3.5 | % |
Consolidated net sales decrease was lowerdriven by net sales decline in the Home Meridian segment, and to a lesser extent in the Hooker Branded segment and All Other. Incoming orders declined primarily due to the soft retail environment, especially earlier in the fiscal 2019 third quarteryear.
■ | Net sales decreased in the Hooker Branded segment due to decreased net sales in the Hooker Casegoods division, partially offset by a net sales increase at Hooker Upholstery. Unit volume decreased in this segment while ASP increased due to price increases in response to excess tariffs and higher freight costs, lower discounts, as well as increased sales of higher-priced sofas and sectionals at Hooker Upholstery. Net sales were negatively impacted by higher than expected allowances on increased e-commerce sales. |
■ | Net sales decreased in Home Meridian segment due to sales volume loss with club accounts and major furniture chains, as well as higher allowances and chargebacks due to quality issues, partially offset by increased volume in the Samuel Lawrence Hospitality business and e-commerce sales growth. ASP increased at Samuel Lawrence Hospitality due to favorable product mix and Accentrics Home which focuses on e-commerce channels, partially offset by decreased ASP in the traditional channels. |
■ | All Other net sales decreased due to sales declines at our domestic upholstery manufacturing divisions which experienced reduced incoming orders, partially offset by a strong net sales increase at H Contract. ASP increased in all four divisions included in All Other; however, it was not sufficient to mitigate the volume loss. |
Gross Income and Margin | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 38,323 | 31.2 | % | $ | 41,372 | 31.9 | % | $ | (3,049 | ) | -7.4 | % | |||||||||||
Home Meridian | 24,139 | 10.0 | % | 43,196 | 16.2 | % | (19,057 | ) | -44.1 | % | ||||||||||||||
All Other | 20,279 | 24.5 | % | 18,879 | 21.8 | % | 1,400 | 7.4 | % | |||||||||||||||
Consolidated | $ | 82,741 | 18.6 | % | $ | 103,447 | 21.4 | % | $ | (20,706 | ) | -20.0 | % |
Consolidated gross profit decreased in absolute terms and as a resultpercentage of net sales in the recently enacted Tax Cuts and Jobs Act of 2017.fiscal 2020 first nine months.
■ | The Hooker Branded segment’s gross profit decreased due to lower net sales and increased cost of sales in Hooker Casegoods, partially offset by increased gross profit in Hooker Upholstery due to steady sales growth, favorable product mix, and the absence of a $500,000 casualty loss recorded in fiscal 2019 second quarter. Hooker Branded segment product costs were negatively impacted by excess tariffs and higher freight costs. |
■ | The Home Meridian segment’s gross margin decreased in absolute terms and as a percentage of net sales due primarily to the sales decline, increased product costs and loss of margin due to higher quality allowances. This segment was more impacted by excess tariff costs, increased freight costs, resourcing transition costs, and increased warehousing and distribution costs to handle excess inventory related to quality issues and inventory build due to business being slower than forecast. |
■ | All Other’s gross profit increased in absolute terms and as a percentage of net sales, primarily due to the sales increase at H Contract; however, all four divisions improved gross margin as a percentage of net sales. In our domestic upholstery manufacturing divisions, favorable cost of goods sold was attributable to lower material costs, lower benefits expense and cost containment efforts, partially offset by under-absorbed overhead and operating costs as our domestic upholstery divisions continue to operate at lower production levels due to reduced incoming orders. H Contract benefitted from favorable product mix and contributed 75% of the increased gross profit in All Other. |
Net Income | ||||||||||||||||||||||||
Thirteen Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
Net Income | % Net Sales | % Net Sales | ||||||||||||||||||||||
Consolidated | $ | 9,332 | 5.4 | % | $ | 7,202 | 4.6 | % | $ | 2,130 | 29.6 | % | ||||||||||||
Diluted earnings per share | 0.79 | $ | 0.61 |
Fiscal 2019 First Nine Months Compared to Fiscal 2018 First Nine Months
Net Sales | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 129,801 | 26.9 | % | $ | 120,934 | 27.2 | % | $ | 8,867 | 7.3 | % | ||||||||||||
Home Meridian | 266,631 | 55.2 | % | 262,173 | 58.9 | % | 4,458 | 1.7 | % | |||||||||||||||
All Other | 86,594 | 17.9 | % | 62,007 | 13.9 | % | 24,587 | 39.7 | % | |||||||||||||||
Consolidated | $ | 483,026 | 100 | % | $ | 445,114 | 100 | % | $ | 37,912 | 8.5 | % |
Unit Volume |
| FY19 YTD % Increase vs. FY18 YTD |
| Average Selling Price (ASP) |
| FY19 YTD % Increase vs. FY18 YTD |
|
|
|
|
|
|
|
Hooker Branded |
| 8.9% |
| Hooker Branded |
| -1.8% |
Home Meridian |
| 1.3% |
| Home Meridian |
| -0.9% |
All Other* |
| -6.3% |
| All Other* |
| 6.6% |
Consolidated |
| 1.9% |
| Consolidated |
| 0.2% |
*Shenandoah is excluded from All Other in the Unit Volume and ASP tables above since only one month of its results was included in our fiscal 2018 first nine-month results. Consequently, we believe including its fiscal 2019 first nine-month results would skew All Other results and reduce the usefulness of the table above.
Consolidated net sales increased due primarily to the inclusion of Shenandoah’s net sales in All Other as well as sales increases in the Hooker Branded and Home Meridian segments. The net sales increase in All Other was attributable to the addition of eight months of Shenandoah net sales in the first nine months and to a lesser extent, sales growth at Bradington-Young, partially offset by a sales decrease at Sam Moore. Hooker Branded segment ASP decreased slightly due to product mix. Hooker Branded segment unit volume increased due to our focus on winning channels of distribution, strong product lines and in-stock positions on best-sellers. The Home Meridian segment’s net sales increased modestly for the year. Home Meridian segment sales were negatively affected by vendor shipping delays in the first quarter as the result of the timing of Chinese New Year. Primarily in the third quarter, sales recovered from this issue, resulting in an increase of $4.5 million over prior year nine months. Home Meridian segment ASP decreased slightly due to mix of customers. All Other’s ASP increased due to increased sales of higher-priced Bradington-Young products and the lack of Homeware liquidation sales due to the shuttering of that division in the prior year. All Other’s unit volume decreased due to the volume decline at Sam Moore and the lack of Homeware unit volume in the current fiscal year.
Gross Income and Margin | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 41,372 | 31.9 | % | $ | 38,177 | 31.6 | % | $ | 3,195 | 8.4 | % | ||||||||||||
Home Meridian | 43,196 | 16.2 | % | 42,875 | 16.4 | % | 321 | 0.7 | % | |||||||||||||||
All Other | 18,879 | 21.8 | % | 14,486 | 23.4 | % | 4,393 | 30.3 | % | |||||||||||||||
Consolidated | $ | 103,447 | 21.4 | % | $ | 95,538 | 21.5 | % | $ | 7,909 | 8.3 | % |
Consolidated gross profit increased in absolute terms due to increases in All Other and in the Hooker Branded segment. All Other gross profit increased primarily due to the addition of Shenandoah’s results. Hooker Branded segment gross profit increased due to sales growth (partially offset by $500,000 casualty loss recorded in the fiscal 2019 second quarter) and the absence of a one-time vendor price concession due to a vendor quality issue which led to lower product costs in the fiscal 2018 first quarter. Home Meridian’s gross profit increased slightly in absolute terms and stayed essentially flat as a percentage of net sales.
Selling and Administrative Expenses (S&A) | Selling and Administrative Expenses (S&A) | |||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Hooker Branded | $ | 23,992 | 18.5 | % | $ | 23,132 | 19.1 | % | $ | 860 | 3.7 | % | $ | 22,870 | 18.6 | % | $ | 23,992 | 18.5 | % | $ | (1,122 | ) | -4.7 | % | |||||||||||||||||||||||
Home Meridian | 32,027 | 12.0 | % | 31,126 | 11.9 | % | 901 | 2.9 | % | 32,152 | 13.4 | % | 32,027 | 12.0 | % | 125 | 0.4 | % | ||||||||||||||||||||||||||||||
All Other | 12,131 | 14.0 | % | 9,488 | 15.3 | % | 2,643 | 27.9 | % | 12,264 | 14.8 | % | 12,131 | 14.0 | % | 133 | 1.1 | % | ||||||||||||||||||||||||||||||
Consolidated | $ | 68,150 | 14.1 | % | $ | 63,746 | 14.3 | % | $ | 4,404 | 6.9 | % | $ | 67,286 | 15.1 | % | $ | 68,150 | 14.1 | % | $ | (864 | ) | -1.3 | % |
Consolidated S&A expenses increaseddecreased in absolute terms and decreased slightlybut increased as a percentage of net sales due primarily toin the addition of Shenandoah’s operations and increased net sales.fiscal 2020 first nine months.
■ | Hooker Branded segment S&A expenses |
■ | Home Meridian segment S&A expenses increased in absolute terms |
■ |
|
Intangible Asset Amortization | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 1,788 | 0.4 | % | $ | 1,291 | 0.3 | % | $ | 497 | 38.5 | % |
Intangible Asset Amortization | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Intangible asset amortization | $ | 1,788 | 0.4 | % | $ | 1,788 | 0.4 | % | $ | - | 0.0 | % |
Intangible asset amortization expense was higher instayed the currentsame compared to the prior year nine-month periodperiod.
Operating Profit (Loss) and Margin | |||||||||||||||||||||||||
Thirty-Nine Weeks Ended | |||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | ||||||||||||||||||||||
% Net Sales | % Net Sales | ||||||||||||||||||||||||
Hooker Branded | $ | 15,453 | 12.6 | % | $ | 17,381 | 13.4 | % | $ | (1,928 | ) | -11.1 | % | ||||||||||||
Home Meridian | (9,013 | ) | -3.7 | % | 10,168 | 3.8 | % | (19,181 | ) | -188.6 | % | ||||||||||||||
All Other | 7,227 | 8.7 | % | 5,960 | 6.9 | % | 1,267 | 21.3 | % | ||||||||||||||||
Consolidated | $ | 13,667 | 3.1 | % | $ | 33,509 | 6.9 | % | $ | (19,842 | ) | -59.2 | % |
Operating profitability decreased in absolute terms and as a percentage of net sales in fiscal 2020 first nine months, due to the addition of Shenandoah acquisition-related amortization expense.factors discussed above.
Interest Expense, net | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 986 | 0.2 | % | $ | 1,099 | 0.2 | % | $ | (113 | ) | -10.3 | % |
Operating Profit and Margin | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Hooker Branded | $ | 17,381 | 13.4 | % | $ | 15,047 | 12.4 | % | $ | 2,334 | 15.5 | % | ||||||||||||
Home Meridian | 10,168 | 3.8 | % | 10,748 | 4.1 | % | (580 | ) | -5.4 | % | ||||||||||||||
All Other | 5,960 | 6.9 | % | 4,706 | 7.6 | % | 1,254 | 26.6 | % | |||||||||||||||
Consolidated | $ | 33,509 | 6.9 | % | $ | 30,501 | 6.9 | % | $ | 3,008 | 9.9 | % |
Operating profitability increased in absolute terms and stayed flat as a percentage of net sales for the fiscal 2019 first nine months compared to the same prior-year period, due to the factors discussed above.
Interest Expense, net | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated interest expense, net | $ | 1,099 | 0.2 | % | $ | 860 | 0.2 | % | $ | 239 | 27.8 | % |
Consolidated interest expense increaseddecreased due to increases in theloan balances, partially offset by increased interest rates on our variable-rate term loans and additional interest expense on the Shenandoah acquisition-related term loan, partially offset by the $10 million unscheduled loan payment made on the New Unsecured Term Loan in the first quarter of fiscal 2019.loans.
Income taxes | Income taxes | |||||||||||||||||||||||||||||||||||||||||||||||
Thirty-Nine Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||||||||||||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||
% Net Sales | % Net Sales | % Net Sales | % Net Sales | |||||||||||||||||||||||||||||||||||||||||||||
Consolidated income tax expense | $ | 7,504 | 1.6 | % | $ | 10,574 | 2.4 | % | $ | (3,070 | ) | -29.0 | % | $ | 2,829 | 0.6 | % | $ | 7,504 | 1.6 | % | $ | (4,675 | ) | -62.3 | % | ||||||||||||||||||||||
Effective Tax Rate | 23.0 | % | 34.9 | % | 21.9 | % | 23.0 | % |
We recorded income tax expense of $7.5$2.8 million for the fiscal 20192020 first nine months compared to $10.6$7.5 million for the samecomparable prior year period. The effective tax rates for the fiscal 2020 and 2019 first nine months were 21.9% and 2018 first nine-months were 23.0% and 34.9%, respectively. Our effective tax rate was lower in the fiscal 2019 nine-month period as a result of the recently enacted Tax Cuts and Jobs Act of 2017, 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.
Net Income | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
October 28, 2018 | October 29, 2017 | $ Change | % Change | |||||||||||||||||||||
Net Income | % Net Sales | % Net Sales | ||||||||||||||||||||||
Consolidated | $ | 25,181 | 5.2 | % | $ | 19,726 | 4.4 | % | $ | 5,455 | 27.7 | % | ||||||||||||
Diluted earnings per share | $ | 2.13 | $ | 1.69 |
Net Income | ||||||||||||||||||||||||
Thirty-Nine Weeks Ended | ||||||||||||||||||||||||
November 3, 2019 | October 28, 2018 | $ Change | % Change | |||||||||||||||||||||
% Net Sales | % Net Sales | |||||||||||||||||||||||
Consolidated | $ | 10,067 | 2.3 | % | $ | 25,181 | 5.2 | % | $ | (15,114 | ) | -60.0 | % | |||||||||||
Diluted earnings per share | $ | 0.85 | $ | 2.13 |
Outlook
Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for the tariffs to increase to 25% in 2019. In fiscal 2018, approximately 40% of our sales were imported from China. We are increasing inventory levels ahead of the possible imposition of the 25% tariff. Additionally, we are pursuing additional sourcing relationships outside of China. Our 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.
As of the end of the fiscal 2019 third quarter, consolidated orders were up 19%, and backlog was up 17% compared to the prior-year quarter, with the higher backlog driven by Home Meridian. At Hooker Branded, Hooker Casegoods has fueled momentum with a speed-to-market strategy in which the division pre-ordered two major new collections prior to the Fall High Point Market that had been favorably previewed by major retailers in late summer. Because these collections will begin shipping to retailers in early January, several months quicker than the typical product introduction cycle, we were able to get additional retail placements at market. At Home Meridian, several initiatives are now in place to re-energize its business through traditional channels. These initiatives span multiple business units and we expect they will begin delivering improved sales results in the fourth quarter of fiscal 2019. We expect fourth quarter shipments to be very strong based on current order and backlog trends and that improved sales in the fourth quarter will leverage fixed costs and improve profitability at Home Meridian for the period. In All Other, while the top line is solid at Bradington-Young and Shenandoah, we are working on improvements that will help to bring profitability at each division back to historical levels. With the solid growth at Bradington-Young over the last four fiscal years, we are investing over $5 million dollars in a factory expansion in Hickory, N.C. that will be completed early next year. We expect capacity will increase by 50%. The Sam Moore division is actively searching for a new president and we expect to have a new president in place by the end of the fiscal year. Additionally, H Contract is on the front end of a strategy to broaden its product line and pursue a more aggressive product introduction strategy. Orders were up nearly 8% in the quarter, and quarter-end backlog is up over 26% compared to the same period last year. The Hooker Branded Segment, along with the domestic upholstery divisions of All Other, continue to gain positive traction from a long-range strategy to develop new business in advantaged and winning channels of distribution, particularly Interior Design and e-commerce channels.
We view macroeconomic trends as a bit more mixed and uncertain than in recent months given a bumpy stock market, a slow-down in the housing sector and our concerns about a further increase in the China tariffs in 2019. However, based on incoming order trends, higher backlogs at Home Meridian, overall momentum in our businesses, recent progress in trade negotiations between the U.S. and China, we are bullish as we look to the fourth quarter.
We face a number of significant risks and uncertainties, as more fully discussed in Item 1A, “Risk Factors” in our 20182019 Annual ReportReport.
Compared to the fiscal 2020 second quarter, consolidated orders increased by about $8 million or 5% in the fiscal 2020 third quarter. However, compared to the same period a year ago, consolidated orders dipped approximately $15 million or about 8%. The decline in orders from the one large Home Meridian segment customer is a significant part of that reduction, along with the subdued demand resulting from increased prices due to tariffs. While some retail components of the home furnishings industry like large national chains, club stores, international sales and full-line furniture independent retailers are sluggish, sales performance in other channels such as e-commerce, hospitality, contract furniture and interior design are up.
On a consolidated basis, we expect earnings to improve on a sequential basis next quarter. We believe the earnings performance momentum we have in the Hooker Branded segment and in All Other will continue, and for the Home Meridian segment earnings to improve significantly from the third quarter of fiscal 2020 despite the reduced volume from the single large customer.
However, there are two calendar dynamics that will impact our performance in the fourth quarter of fiscal 2020. First, last year was a 53-week leap year, so Company-wide we will have one less week of shipments this quarterly report on Form 10-Q.year. In addition to this lost week of shipping, the Chinese and Vietnamese New Year holiday vacations are earlier, which will result in an additional five to ten fewer shipping days this fiscal year for our container direct customers.
We remain highly engaged as a management team in strategic planning and continue to benefit from having a diverse portfolio of 11 operating units across many different distribution channels, price points and products. We are addressing our long-term and short-term challenges and have active strategies in place to expand our business beyond the current product line and customer base. We remain confident in our business model, market position and strategies and believe we will adapt successfully to the challenges posed by the current business climate.
Financial Condition, Liquidity and Capital Resources
Cash Flows – Operating, Investing and Financing Activities
Thirty-Nine Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||||
October 28, | October 29, | November 3, | October 28, | |||||||||||||
2018 | 2017 | 2019 | 2018 | |||||||||||||
Net cash provided by operating activities | $ | 20,919 | $ | 25,065 | $ | 26,610 | $ | 20,919 | ||||||||
Net cash used in investing activities | (1,760 | ) | (35,899 | ) | (3,838 | ) | (1,760 | ) | ||||||||
Net cash (used in)/provided by financing activities | (20,625 | ) | 3,399 | |||||||||||||
Net decrease in cash and cash equivalents | $ | (1,466 | ) | $ | (7,435 | ) | ||||||||||
Net cash used in financing activities | (9,709 | ) | (20,625 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | $ | 13,063 | $ | (1,466 | ) |
During the nine months ended November 3, 2019, we used some of the $26.6 million of cash generated from operations and $1.4 million of proceeds on a note receivable to pay for $5.3 million in cash dividends, $4.7 million of capital expenditures to expand our domestic manufacturing capacities and to enhance our business systems and facilities, $4.4 million in long-term debt payments, and $558,000 in life insurance premiums.
In comparison, during the nine months ended October 28, 2018, cash generated from operations of $20.9 million (despite a $3.0 million contribution to our Pension Plan) and $1.2 million in proceeds received under Company-owned life insurance policies helped to pay $15.7 million in long-term debt payments, $4.9 million in cash dividends, $2.5 million of capital expenditures to enhance our business systems and facilities, and $620,000 in life insurance premiums.
In comparison, during the nine months period ended October 29, 2017, cash generated from operations, cash on hand and $12 million term-loan proceeds helped fund the Shenandoah acquisition, pay $4.4 million in long-term debt payments, cash dividends of $4.2 million ,capital expenditures of $2.7 million to enhance our business systems and facilities, and $639,000 in life insurance premiums.
Liquidity, Financial Resources and Capital Expenditures
Our financial resources include:
■ | available cash and cash equivalents, which are highly dependent on incoming order rates and our operating performance; |
■ | expected cash flow from operations; and |
■ | available lines of credit. |
We believe these resources are sufficient to meet our business requirements through fiscal 20192020 and for the foreseeable future, including:
■ | capital expenditures; |
■ | working capital, including capital required to fund our |
■ | the payment of regular quarterly cash dividends on our common stock; and |
■ | the servicing of our acquisition-related debt. |
Loan Agreements and Revolving Credit Facility
We currently have twoone unsecured term loansloan and one secured term loan outstanding and a revolving credit facility. The term loans are related to the Home Meridian and Shenandoah acquisitions.acquisition. Details of our loan agreements and revolving credit facility are detailedoutlined below.
Original Loan Agreement
On February 1, 2016, we entered into an amended and restated loan agreement (the “Original Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the closing of the Home Meridian acquisition. Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the “Unsecured Term Loan”) and the Secured Term Loan (the “Secured Term Loan”) in connection with the completion of the Home Meridian acquisition.
Details of the individual credit facilities provided for in the Original Loan Agreement are as follows:
■ | Unsecured revolving credit facility. The Original Loan Agreement increased the amount available under our existing unsecured revolving credit facility from $15 million to $30 million and increased the sublimit of the facility available for the issuance of letters of credit from $3 million to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter; |
■ | Unsecured Term Loan. The Original Loan Agreement provided us with a $41 million Unsecured Term Loan. Any amount borrowed under the Unsecured Term Loan bears interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under the Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and |
■ | Secured Term Loan. The Original Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). Any amount borrowed under the Secured Term Loan bears interest at a rate, adjusted monthly, equal to the then-current LIBOR monthly rate plus 0.50%. We must pay the interest accrued on any principal amounts borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA’s rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Original Loan Agreement. |
New Loan Agreement
On September 29, 2017, we entered into a second amended and restated loan agreement (the “New Loan Agreement”) with BofA in connection with the completion of the Shenandoah acquisition. The New Loan Agreement:
■ | amends and restates the Original Loan Agreement detailed above such that our existing $30 million unsecured revolving credit facility (the “Existing Revolver”), Unsecured Term Loan, and Secured Term Loan all remain outstanding under the New Loan Agreement; and |
■ | provided us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”) |
The New Loan Agreement also included customary representations and warranties and requires us to comply with customary covenants, including, among other things, the following financial covenants:
Maintain a ratio of funded debt to EBITDA not exceeding:
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o | 2.25:1.0 through August 31, 2019; and |
o | 2.00:1.00 thereafter. |
o | A basic fixed charge coverage ratio of at least 1.25:1.00; and |
o | Limit capital expenditures to no more than $15.0 million during any fiscal year beginning in fiscal |
The New Loan Agreement also limits our right to incur other indebtedness, make certain investments and create liens upon our assets, subject to certain exceptions, among other restrictions. The New Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the New Loan Agreement. We paid off the New Unsecured Term Loan in fiscal 2019.
We were in compliance with each of these financial covenants at October 28, 2018November 3, 2019 and expect to remain in compliance with existing covenants for the foreseeable future.
Due to our strong cash position, we made an unscheduled $10 million payment during the first quarter of fiscal 2019 towards the amounts outstanding under the New Unsecured Term Loan. We believe we will save approximately $300,000 in interest expense in fiscal 2019 because of this payment. As of October 28, 2018, $20.4November 3, 2019, $14.0 million was outstanding under the Unsecured Term Loan, $17.1 million was outstanding under the Secured Term Loan, and $286,000 wasrespectively. We expect to refinance any outstanding balances due under the New Unsecured Term Loan, respectively.these term loans prior to their due dates of February 1, 2021.
Revolving Credit Facility Availability
As of October 28, 2018,November 3, 2019, we had an aggregate $28.5$25.7 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.5$4.3 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of October 28, 2018.November 3, 2019. There were no additional borrowings outstanding under the revolving credit facility as of October 28, 2018.November 3, 2019.
Capital Expenditures
We spent $4.7 million for capital expenditures during fiscal 2020 first nine months, $3.3 million of which was spent on the expansion of our Bradington-Young manufacturing facility. We expect to spend between $500,000 to $1.0 million in capital expenditures inminimal amounts during the fourth quarterremainder of the 2019 fiscal year2020 to maintain and continue to enhance our operating systems and facilities.
Share Repurchase Authorization
During fiscal 2013, our Board of Directors authorized the repurchase of up to $12.5 million of shares of the Company’s common stock. The authorization does not obligate us to acquire a specific number of shares during any period and does not have an expiration date, but it may be modified, suspended or discontinued at any time at the 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 and other factors we deem relevant. No shares have been repurchased since fiscal 2013. Approximately $11.8 million remained available for future repurchases under the authorization as of October 28, 2018.November 3, 2019.
Commitments and Contractual Obligations
As of November 3, 2019, our commitments and contractual obligations related to our operating leases 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 | ||||||||||||||||
Operating leases* | 2,516 | 20,366 | 10,507 | 15,155 | 48,544 |
*These amounts represent estimated cash payments due under operating leases for real estate utilized in our operations and warehouse and office equipment, as well as short term leases with remaining terms less than 12 months. See Note 9 for additional information and disclosures about our leases.
Recently Issued Accounting Standards
In FebruaryJune 2016, the FASB issued ASU 2016-02 Leases, which, among2016-13, Financial Instruments—Credit Losses (Topic 326). This update seeks to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments, including trade receivables, and other things,commitments to extend credit held by a reporting entity at each reporting date. The amendments require an entity to replace the incurred loss impairment methodology in current GAAP with a methodology that reflects current expected credit losses and requires lesseesconsideration of a broader range of reasonable and supportable information to recognize a right-of-use assetinform credit loss estimates. The amendments are effective for fiscal years, and a liability on the balance sheet for all leases, with the exception of short-term leases. This change will increase reported assets and liabilities by lessees– in some cases very significantly.interim periods within those fiscal years, beginning after December 15, 2019. The lease liability recognizedamendments will be equalapplied through a cumulative-effect adjustment to the present valueretained earnings as of lease payments and the right-of-use asset will be based on the lease liability, subject to adjustment such as for initial direct costs. Leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting remains substantially similar to current GAAP. ASU 2016-02 supersedes Topic 840, Leases. Originally, entities were required to adopt ASU 2016-02 using a modified retrospective transition method. However, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities with an additional transition method. Under ASU 2018-11, entities have the option of initially applying the new lease guidance at the adoption date, rather than at the beginning of the earliestfirst reporting period presented and recognizing the cumulative effect of applying the new standard as an adjustment to beginning retained earnings in the year of adoption while continuing to present all prior periods under previous lease accounting guidance. We expect to elect this transition method at the adoption date of February 4, 2019 and are currently evaluating the practical expedients available to us aswhich guidance is effective, which is a result of using this method of adoption. During the first nine-months of fiscal 2019, we identified all of our leases, the majority of which are for real estate used in our operations and substantially completed an initial search for embedded leases in our contracts and agreements. Based on initial calculations, we expect to record a significant right-of-use asset and lease liability upon adoption.modified-retrospective approach. We are continuing to evaluatepresently completing our analysis of the impact that the adoptioneffects of ASU 2016-02 will haveadopting this standard on our consolidated financial statements. During the remaining months before adoption,statements and results of operations. Based on our analysis to-date, we are working to complete our search for embedded leases, ensure the accuracy and completeness of the identified lease population and our initial calculations, as well as evaluating changes needed to our accounting processes and internal controls upon adoption.
In August 2018, the FASB issued ASU No. 2018-14, Compensation —Retirement Benefits —Defined Benefit Plans —General (Subtopic 715-20) —Disclosure Framework —Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). The amendments in this update change the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans. It eliminates requirements for certain disclosures that are no longer considered cost beneficial and requires new disclosures that the FASB considers pertinent. The guidance is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expectbelieve the adoption of ASU 2018-14this standard will have a material impacteffect on our consolidated financial statements or disclosures.
Casualty Loss
On May 18, 2018, the Martinsville/Henry County, Va. area experienced torrential rains. Tworesults of our Hooker Branded segment warehouse facilities were damaged as a result. The casualty loss caused only a nominal disruption in our ability to fulfill and ship orders. The costs associated with the recovery efforts exceeded our insurance deductible of $500,000. Consequently, we recorded a $500,000 casualty loss during the fiscal 2019 second quarter. We incurred another $409,000 of repair and remediation-related expenses during the third quarter, which we received from our casualty insurer in early December 2018.operations.
Critical Accounting Policies
Except as discussed below, there have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 20182019 Annual Report.
On the first day of the current fiscal year, we adopted the accounting standardsstandard outlined in Part 1, Notes to Condensed Consolidated Financial Statements, “Note 2. Recently Adopted Accounting Policies” (“Note 2”). See Note 2 for additional information related to the impact of adopting thesethis accounting standards.standard.
Item 3. Quantitative and Qualitative Disclosures AboutAbout Market Risk
We are exposed to various types of market risk in the normal course of our business, including the impact of interest rate changes, raw materials price risk and changes in foreign currency exchange rates, which could impact our results of operations or financial condition. We manage our exposure to this risk through our normal operating activities.
Interest Rate Risk
Borrowings under our revolving credit facility and the Unsecured Term Loan bear interest based on LIBOR plus 1.5% and borrowings under the Secured Term Loan bear interest based on LIBOR plus 0.5%. As such, these debt instruments expose us to market risk for changes in interest rates. There was no outstanding balance under our revolving credit facility as of October 28, 2018,November 3, 2019, other than standby letters of credit in the amount of $1.5 million. However,$4.3 million; however, as of October 28, 2018, $37.7November 3, 2019, $31.1 million was outstanding under our term loans. A 1% increase in the LIBOR rate would result in an annual increase in interest expenses on our terms loans of approximately $343,000.$284,000.
Raw Materials Price Risk
We are exposed to market risk from changes in the cost of raw materials used in our domestic upholstery manufacturing processes; principally, wood, fabric and foam products. Increases in home construction activity could result in increases in wood and fabric costs. Additionally, the cost of petroleum-based foam products we utilize are sensitive to crude oil prices, which vary due to supply, demand and geo-political factors.
Currency Risk
For imported products, we generally negotiate firm pricing denominated in U.S. Dollars with our foreign suppliers, typically for periods of at least one year. We accept the exposure to exchange rate movements beyond these negotiated periods. We do not use derivative financial instruments to manage this risk but could choose to do so in the future. Most of our imports are purchased from suppliers located in Vietnam and China. The Chinese currency floats within a limited range in relation to the U.S. Dollar, resulting in exposure to foreign currency exchange rate fluctuations.
Since we transact our imported product purchases in U.S. Dollars, a relative decline in the value of the U.S. Dollar could increase the price we pay for imported products beyond the negotiated periods. We generally expect to reflect substantially all of the effect of any price increases from suppliers in the prices we charge for imported products. However, these changes could adversely impact sales volume or profit margins during affected periods.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended October 28, 2018.November 3, 2019. Based on this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective as of October 28, 2018November 3, 2019 to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Company’s management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
On September 29, 2017, we acquired the assets and certain liabilities of Shenandoah Furniture, Inc. As permitted by SEC guidance for newly acquired businesses, we excluded the Shenandoah segment’s operations from the scope of our Sarbanes-Oxley Section 404 report on internal controls over financial reporting for the year ended January 28, 2018. We are in the process of implementing our internal control in the Shenandoah segment’s operations and expect that this effort will be completed in fiscal 2019.
There have been no changes in our internal control over financial reporting during the fiscal quarter ended October 28, 2018,November 3, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Other than the item mentioned below, there has been no material change in the risk factors set forth under Part 1, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2018.
Recently enacted tariffs on manufactured goods imported from China could adversely affect our business.
Effective September 24, 2018, the current U.S. administration imposed a 10% tariff on certain goods imported into the United States from China, including all furniture and furniture components manufactured in China, with the potential for the tariffs to increase to 25% in 2019. In fiscal 2018, approximately 40% of our sales were imported 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.
Item 6. Exhibits
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| 4.1 | Amended and Restated Articles of Incorporation of the Company, as amended (See Exhibit 3.1) |
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| 4.2 | Amended and Restated Bylaws of the Company, as amended (See Exhibit 3.2) |
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| 31.1* | Rule 13a-14(a) Certification of the Company’s principal executive officer |
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| 31.2* | Rule 13a-14(a) Certification of the Company’s principal financial officer |
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| 32.1** | |
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| 101* | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended |
*Filed herewith
** Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HOOKER FURNITURE CORPORATION |
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Date: December | By: | /s/ Paul A. Huckfeldt |
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| Paul A. Huckfeldt |
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| Chief Financial Officer and | |
Senior Vice President – Finance and | |||
Accounting |
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