10-Q 1 hookerfurn20221030_10q.htm FORM 10-Q hookerfurn20221030_10q.htm


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended October 30, 2022

 

Commission file number 000-25349

 

HOOKER FURNISHINGS 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

(Registrants 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 filer

Non-accelerated Filer ☐

Smaller reporting company

Emerging growth company

 

 

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

 

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

 

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

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, no par value 

HOFT

NASDAQ Global Select Market

 

As of December 2, 2022, there were 11,331,837 shares of the registrant’s common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 
     

Item 1.

Financial Statements

3

     

Item 2.

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

20

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

32

     

Item 4.

Controls and Procedures

33

     

PART II. OTHER INFORMATION

 
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

     

Item 6.

Exhibits

34

     

Signature

35

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

As of

 

October 30,

   

January 30,

 
   

2022

   

2022

 
   

(unaudited)

         

Assets

               

Current assets

               

Cash and cash equivalents

  $ 6,508     $ 69,366  

Trade accounts receivable, net

    76,049       73,727  

Inventories

    133,943       75,023  

Income tax recoverable

    2,003       4,361  

Prepaid expenses and other current assets

    7,914       5,237  

Total current assets

    226,417       227,714  

Property, plant and equipment, net

    27,704       28,058  

Cash surrender value of life insurance policies

    27,587       26,479  

Deferred taxes

    9,947       11,612  

Operating lease right-of-use assets

    52,478       51,854  

Intangible assets, net

    32,669       23,853  

Goodwill

    14,952       490  

Other assets

    8,497       4,499  

Total non-current assets

    173,834       146,845  

Total assets

  $ 400,251     $ 374,559  
                 

Liabilities and Shareholders Equity

               

Current liabilities

               

Current portion of long-term debt

  $ 1,393     $ -  

Trade accounts payable

    30,320       30,916  

Accrued salaries, wages and benefits

    8,078       7,141  

Customer deposits

    9,144       7,145  

Current portion of operating lease liabilities

    6,922       7,471  

Other accrued expenses

    3,679       4,264  

Total current liabilities

    59,536       56,937  

Long term debt

    23,222       -  

Deferred compensation

    9,443       9,924  

Operating lease liabilities

    47,504       46,570  

Other long-term liabilities

    957       -  

Total long-term liabilities

    81,126       56,494  

Total liabilities

    140,662       113,431  
                 

Shareholders’ equity

               

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

11,421 and 11,922 shares issued and outstanding on each date

    51,868       53,295  

Retained earnings

    207,725       207,884  

Accumulated other comprehensive loss

    (4 )     (51 )

Total shareholders’ equity

    259,589       261,128  

Total liabilities and shareholders’ equity

  $ 400,251     $ 374,559  

 

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

 

 

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30,

   

October 31,

   

October 30,

   

October 31,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net sales

  $ 151,580     $ 133,428     $ 451,803     $ 458,807  
                                 

Cost of sales

    119,572       113,421       359,281       373,501  
                                 

Gross profit

    32,008       20,007       92,522       85,306  
                                 

Selling and administrative expenses

    24,712       21,139       72,255       63,343  

Intangible asset amortization

    878       596       2,634       1,788  
                                 

Operating income/(loss)

    6,418       (1,728 )     17,633       20,175  
                                 

Other income, net

    191       133       425       160  

Interest expense, net

    434       27       546       81  
                                 

Income/(Loss) before income taxes

    6,175       (1,622 )     17,512       20,254  
                                 

Income tax expense/(benefit)

    1,334       (403 )     3,946       4,563  
                                 

Net income/(loss)

  $ 4,841     $ (1,219 )   $ 13,566     $ 15,691  
                                 

Earnings/(Loss) per share

                               

Basic

  $ 0.42     $ (0.10 )   $ 1.16     $ 1.32  

Diluted

  $ 0.42     $ (0.10 )   $ 1.14     $ 1.30  
                                 

Weighted average shares outstanding:

                               

Basic

    11,465       11,863       11,736       11,849  

Diluted

    11,525       11,863       11,838       12,017  
                                 

Cash dividends declared per share

  $ 0.20     $ 0.18     $ 0.60     $ 0.54  

 

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

 

 

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(In thousands)

(Unaudited)

 

   

For the

 
   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30,

   

October 31,

   

October 30,

   

October 31,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net income/(loss)

  $ 4,841     $ (1,219 )   $ 13,566     $ 15,691  

Other comprehensive income:

                               

Amortization of actuarial loss

    21       100       62       301  

Income tax effect on amortization

    (5 )     (24 )     (15 )     (72 )

Adjustments to net periodic benefit cost

    16       76       47       229  
                                 

Total comprehensive income/(loss)

  $ 4,857     $ (1,143 )   $ 13,613     $ 15,920  

 

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

 

 

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

   

For the

 
   

Thirty-Nine Weeks Ended

 
   

October 30,

   

October 31,

 
   

2022

   

2021

 

Operating Activities:

               

Net income

  $ 13,566     $ 15,691  

Adjustments to reconcile net income to net cash

(used in)/provided by operating activities:

               

Depreciation and amortization

    6,578       5,623  

Deferred income tax expense

    1,650       2,266  

Noncash restricted stock and performance awards

    1,323       367  

Provision for doubtful accounts and sales allowances

    (3,831 )     474  

Gain on life insurance policies

    (744 )     (802 )

Changes in assets and liabilities:

               

Trade accounts receivable

    3,069       9,230  

Inventories

    (56,343 )     (7,705 )

Income tax recoverable

    2,357       (3,098 )

Prepaid expenses and other assets

    (5,863 )     (4,074 )

Trade accounts payable

    (1,522 )     (15,632 )

Accrued salaries, wages, and benefits

    936       (1,140 )

Accrued income taxes

    -       (501 )

Customer deposits

    (1,277 )     2,294  

Operating lease liabilities

    (238 )     120  

Other accrued expenses

    (391 )     2,104  

Deferred compensation

    (419 )     (243 )

Net cash (used in)/provided by operating activities

  $ (41,149 )   $ 4,974  
                 

Investing Activities:

               

Acquisitions

    (25,912 )     -  

Purchases of property and equipment

    (3,469 )     (6,626 )

Premiums paid on life insurance policies

    (464 )     (533 )

Net cash used in investing activities

    (29,845 )     (7,159 )
                 

Financing Activities:

               

Proceeds from long-term loans

    25,000       -  

Payments for long-term loans

    (350 )     -  

Proceeds from revolving credit facility

    36,190       -  

Payments for revolving credit facility

    (36,190 )     -  

Debt issuance cost

    (38 )     -  

Purchase and retirement of common stock

    (9,359 )     -  

Cash dividends paid

    (7,117 )     (6,437 )

Cash provided by/(used in) financing activities

    8,136       (6,437 )
                 

Net decrease in cash and cash equivalents

    (62,858 )     (8,622 )

Cash and cash equivalents - beginning of year

    69,366       65,841  

Cash and cash equivalents - end of quarter

  $ 6,508     $ 57,219  
                 

Supplemental disclosure of cash flow information:

               

Cash paid/(refund) for income taxes

  $ (1 )   $ 5,858  

Cash paid for interest, net

    293       1  
                 

Non-cash transactions:

               

Increase in lease liabilities arising from changes in right-of-use assets

  $ 7,402     $ 23,736  

Increase in property and equipment through accrued purchases

    112       17  

 

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

 

 

HOOKER FURNISHINGS 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 (loss)

   

Equity

 

Balance at August 1, 2021

    11,924     $ 53,473     $ 217,613     $ (655 )   $ 270,431  

Net income for the 13 weeks ended October 31, 2021

                    (1,219 )             (1,219 )

Unrealized loss on defined benefit plan, net of tax of $24

                            76       76  

Cash dividends paid and accrued ($0.18 per share)

                    (2,152 )             (2,152 )

Restricted stock grants, net of forfeitures

    (2 )     (125 )                     (125 )

Restricted stock compensation cost

            216                       216  

Performance-based restricted stock units costs

            126                       126  

PSU awards

            -                       -  

Balance at October 31, 2021

    11,922     $ 53,690     $ 214,242     $ (579 )   $ 267,353  
                                         
                                         
                                         
                                         

Balance at July 31, 2022

    11,959     $ 53,853     $ 210,994     $ (19 )   $ 264,828  

Net income for the 13 weeks ended October 30, 2022

                    4,841               4,841  

Unrealized loss on defined benefit plan, net of tax of $5

                            15       15  

Cash dividends paid and accrued ($0.20 per share)

                    (2,323 )             (2,323 )

Purchase and retirement of common stock

    (530 )     (2,436 )     (5,787 )             (8,223 )

Restricted stock grants, net of forfeitures

    (8 )     -                       -  

Restricted stock compensation cost

            297                       297  

Performance-based restricted stock units costs

            154                       154  

Balance at October 30, 2022

    11,421     $ 51,868     $ 207,725     $ (4 )   $ 259,589  

 

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

 

 

HOOKER FURNISHINGS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONT.)

(In thousands, except per share data)

(Unaudited)

 

                           

Accumulated

         
                           

Other

   

Total

 
   

Common Stock

   

Retained

   

Comprehensive

   

Shareholders'

 
   

Shares

   

Amount

   

Earnings

   

Income (loss)

   

Equity

 

Balance at January 31, 2021

    11,888     $ 53,323     $ 204,988     $ (808 )   $ 257,503  

Net income for the 39 weeks ended October 31, 2021

                    15,691               15,691  

Unrealized loss on defined benefit plan, net of tax of $72

                            229       229  

Cash dividends paid and accrued ($0.54 per share)

                    (6,437 )             (6,437 )

Restricted stock grants, net of forfeitures

    34       (125 )                     (125 )

Restricted stock compensation cost

            813                       813  

Performance-based restricted stock units costs

            419                       419  

PSU awards

            (740 )                     (740 )

Balance at October 31, 2021

    11,922     $ 53,690     $ 214,242     $ (579 )   $ 267,353  
                                         
                                         
                                         
                                         

Balance at January 30, 2022

    11,922     $ 53,295     $ 207,884     $ (51 )   $ 261,128  

Net income for the 39 weeks ended October 30, 2022

                    13,566               13,566  

Unrealized loss on defined benefit plan, net of tax of $15

                            47       47  

Cash dividends paid and accrued ($0.60 per share)

                    (7,117 )             (7,117 )

Purchase and retirement of common stock

    (598 )     (2,751 )     (6,608 )             (9,359 )

Restricted stock grants, net of forfeitures

    97       (102 )                     (102 )

Restricted stock compensation cost

            963                       963  

Performance-based restricted stock units costs

            463                       463  

Balance at October 30, 2022

    11,421     $ 51,868     $ 207,725     $ (4 )   $ 259,589  

 

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

 

 

HOOKER FURNISHINGS 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 30, 2022

 

 

1.         Preparation of Interim Financial Statements

 

The condensed consolidated financial statements of Hooker Furnishings Corporation and subsidiaries (referred to as “we,” “us,” “our,” “Hooker” or the “Company”) have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these statements include all adjustments necessary for a fair statement of the results of all interim periods reported herein. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended January 30, 2022 (“2022 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

 

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the 2023 fiscal year thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began August 1, 2022, and the thirty-nine-week period (also referred to as “nine months”, “nine-month period” or “year-to-date period”) that began January 31, 2022, which both ended October 30, 2022. This report discusses our results of operations for these periods compared to the 2022 fiscal year thirteen-week period that began August 2, 2021, and the thirty-nine-week period that began February 1, 2021, which both ended October 31, 2021; and our financial condition as of October 30, 2022 compared to January 30, 2022.

 

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

 

 

the 2023 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began January 31, 2022 and will end January 29, 2023; and

 

 

the 2022 fiscal year and comparable terminology mean the fifty-two-week fiscal year that began February 1, 2021 and ended January 30, 2022.

 

On January 31, 2022, the first day of our 2023 fiscal year, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sunset HWM, LLC (“Sunset West”) and its three members to acquire substantially all the assets of Sunset West (the “Sunset Acquisition”). Simultaneously, we closed on the transaction by paying $23.9 million in cash and $2 million subject to an escrow arrangement and possible earn-out payments to the Sunset West Members up to an aggregate of $4 million with the closing cash consideration subject to adjustment for customary working capital estimates. In the fourth quarter of fiscal 2023, we received $639,000 from the seller for the final working capital adjustments. Under the Asset Purchase Agreement, the Company also assumed specified liabilities of Sunset West.

 

Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter. Consequently, comparable prior-year information for Sunset West is not included in the financial statements presented in this report. The acquisition is discussed in greater detail below in Note 3 Acquisition.

 

2.          Recently Adopted Accounting Policies

 

No new accounting pronouncements have been adopted in the 2023 fiscal year. We reviewed newly issued accounting pronouncements and concluded they are either not applicable to our business or are not expected to have a material effect on our consolidated financial statements because of future adoption.

 

 

3.         Acquisition

 

In accordance with FASB Accounting Standards Codification Topic 805, “Business Combinations” (“ASC 805”), the Acquisition has been accounted for using the acquisition method of accounting. We recorded assets acquired, including identifiable intangible assets, and liabilities assumed, from Sunset West at their respective fair values at the date of completion of the Acquisition. The excess of the purchase price over the net fair value of such assets and liabilities was recorded as goodwill.

 

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of October 30, 2022. The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revision, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized. In the fourth quarter of fiscal 2023, we received $639,000 from the seller for the final working capital adjustments.

 

Fair Value Estimates of Assets Acquired and Liabilities Assumed

 

The consideration and components of our initial fair value allocation of the purchase price paid at closing and in the subsequent net working capital adjustment consisted of the following:

 

Purchase price consideration

 

Fair value estimates of assets acquired and liabilities assumed

       

Purchase price consideration

       

Cash paid for assets acquired

  $ 23,909  

Cash receivable from the seller for final working capital adjustment

    (639 )

Escrow

    2,003  

Fair value of earnout

    766  

Total purchase price

  $ 26,039  
         

Accounts receivable

  $ 1,560  

Inventory

    2,577  

Prepaid expenses and other current assets

    90  

Property

    7  

Intangible assets

    11,451  

Goodwill

    14,462  

Customer deposits

    (3,276 )

Accounts payable

    (816 )

Accrued expenses

    (16 )

Total purchase price

  $ 26,039  

 

Property was recorded at fair value and primarily consists of machinery and equipment. Property and equipment will be amortized over their estimated useful lives.

 

Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. All goodwill is expected to be deductible for income tax purposes.

 

Intangible assets, consist of two separately identified assets:

 

 

Sunset West customer relationships, which are definite-lived intangible assets with an aggregate fair value of $10.4 million. The customer relationships are amortizable and will be amortized over a period of 10 years; and

 

 

The Sunset West trade name, which is definite-lived intangible asset with fair value of $1.1 million. The trade name is amortizable and will be amortized over a period of 12 years.

 

 

The total weighted average amortization period for these assets is 10.2 years.

 

 

We incurred Acquisition-related costs of $414,000 in fiscal 2022 and $69,000 in the first nine months of fiscal 2023. These expenses were included in the “Selling and administrative expenses” line of our fiscal 2022 and fiscal 2023 condensed consolidated statements of operations. Sunset West’s results are included in the Domestic Upholstery segment’s results beginning with the fiscal 2023 first quarter, which include $8.8 million in net sales and $1.4 million of operating income, including $282,000 in intangible amortization expense for the fiscal 2023 third quarter and $23.6 million in net sales and $2.4 million of operating income, including $846,000 in intangible amortization expense for the fiscal 2023 nine-month period.

 

4.         Accounts Receivable

 

   

October 30,

   

January 30,

 
   

2022

   

2022

 
                 

Gross accounts receivable

  $ 81,479     $ 83,027  

Customer allowances

    (3,832 )     (7,284 )

Allowance for doubtful accounts

    (1,598 )     (2,016 )

Trade accounts receivable

  $ 76,049     $ 73,727  

 

5.          Inventories

 

 

October 30,

 

January 30,

 
 

2022

 

2022

 

Finished furniture

$ 152,977   $ 89,066  

Furniture in process

  2,400     2,314  

Materials and supplies

  13,785     13,179  

Inventories at FIFO

  169,162     104,559  

Reduction to LIFO basis

  (35,219 )   (29,536 )

Inventories

$ 133,943   $ 75,023  

 

6.         Property, Plant and Equipment

 

   

Depreciable Lives

   

October 30,

   

January 30,

 
   

(In years)

   

2022

   

2022

 
                       

Buildings and land improvements

  15 - 30     $ 32,431     $ 32,030  

Computer software and hardware

  3 - 10       15,860       15,648  

Machinery and equipment

  10       11,038       10,390  

Leasehold improvements

 

Term of lease

      11,790       10,984  

Furniture and fixtures

  3 - 10       5,969       5,829  

Other

  5       695       676  

Total depreciable property at cost

          77,783       75,557  

Less accumulated depreciation

          (52,320 )     (49,077 )

Total depreciable property, net

          25,463       26,480  

Land

          1,077       1,077  

Construction-in-progress

          1,164       501  

Property, plant and equipment, net

        $ 27,704     $ 28,058  

 

 

7.          Cloud Computing Hosting Arrangement

 

We are in the process of implementing a common Enterprise Resource Planning (ERP) system across all divisions and expect to go-live with this system at Sunset West in late fiscal 2023 and in our legacy Hooker divisions in early fiscal 2024, with other segments and divisions following thereafter. Based on the provisions of ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software, we capitalize implementation costs incurred to develop internal-use software associated with hosting arrangements that are service contracts. These costs are recorded on “Other noncurrent assets” line of our condensed consolidated balance sheets. Amortization expense is expected to commence at system go-live in the second half of fiscal 2023. The capitalized implementation costs at October 30, 2022 and January 30, 2022 were as follows:

 

   

Capitalized

Implementation Costs

 
         

Balance at January 30, 2022

  $ 3,228  

Costs capitalized during the period

    4,380  

Balance at October 30, 2022

  $ 7,608  

 

8.          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 30, 2022 and January 30, 2022, 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.

 

Our assets measured at fair value on a recurring basis at October 30, 2022 and January 30, 2022, were as follows:

 

   

Fair value at October 30, 2022

   

Fair value at January 30, 2022

 

Description

 

Level 1

   

Level 2

   

Level 3

   

Total

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(In thousands)

 

Assets measured at fair value

                                                               

Company-owned life insurance

  $ -     $ 27,587     $ -     $ 27,587     $ -     $ 26,479     $ -     $ 26,479  

 

 

9.         Intangible Assets

 

During the fiscal 2023 nine-month period, we recorded both non-amortizable and amortizable intangible assets because of the Acquisition. Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Domestic Upholstery and Home Meridian segments, are shown in the following two tables:

 

       

January 30, 2022

           

October 30, 2022

 

Non-amortizable Intangible Assets

 

Segment

 

Beginning Balance

   

Acquisition

   

Net Book Value

 

Goodwill - Shenandoah Furniture

 

Domestic Upholstery

  $ 490     $ -     $ 490  

Goodwill - Sunset West

 

Domestic Upholstery

    -       14,462       14,462  

Total Goodwill

  $ 490     $ 14,462     $ 14,952  
                             

Trademarks and trade names - Home Meridian

 

Home Meridian

    6,650       -       6,650  

Trademarks and trade names

 

Domestic Upholstery

    1,257       -       1,257  

Total Trademarks and trade names

  $ 7,907     $ -     $ 7,907  
                             

Total non-amortizable assets

  $ 8,397     $ 14,462     $ 22,859  

 

Our amortizable intangible assets are recorded in our Home Meridian and Domestic Upholstery segments. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

 

   

Amortizable Intangible Assets

 
   

Customer

                 
   

Relationships

   

Trademarks

   

Totals

 
                         

Balance at January 30, 2022

  $ 15,348     $ 598     $ 15,946  

Acquisition

    10,401       1,050       11,451  

Amortization

    (2,523 )     (111 )     (2,634 )

Balance at October 30, 2022

  $ 23,226     $ 1,537     $ 24,763  

 

For the remainder of fiscal 2023, amortization expense is expected to be approximately $878,000.

 

10.          Leases

 

We have operating leases for warehouses, showrooms, manufacturing facilities, offices and equipment. We recognized sub-lease income of $34,000 for the three-month period and $415,000 for the nine-month period, both ended October 30, 2022. We recognized sub-lease income of $266,000 for the three-month period and $561,000 for the nine-month period, both ended October 31, 2021.

 

The components of lease cost and supplemental cash flow information for leases for the three-months and nine-months ended October 30, 2022 and October 31, 2021 were:

 

   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30, 2022

   

October 31, 2021

   

October 30, 2022

   

October 31, 2021

 

Operating lease cost

  $ 2,291     $ 1,794     $ 7,089     $ 5,712  

Variable lease cost

    62       53       172       162  

Short-term lease cost

    79       27       246       94  

Total lease cost

  $ 2,432     $ 1,874     $ 7,507     $ 5,968  
                                 

Operating lease cash outflows

  $ 2,518     $ 1,843     $ 7,745     $ 5,818  

 

 

The right-of-use assets and lease liabilities recorded on our condensed consolidated balance sheets as of October 30, 2022 and January 30, 2022 were as follows:

 

   

October 30, 2022

   

January 30, 2022

 

Real estate

  $ 51,635     $ 50,749  

Property and equipment

    843       1,105  

Total leases right-of-use assets

  $ 52,478     $ 51,854  
                 

Current portion of operating lease liabilities

  $ 6,922     $ 7,471  

Long term operating lease liabilities

    47,504       46,570  

Total lease liabilities

  $ 54,426     $ 54,041  

 

For leases that commenced before July 2022, we used our incremental borrowing rate which was LIBOR plus 1.5%. When we entered into the new loan agreement our incremental borrowing rate for unsecured term loan became the current BSBY rate plus 1.40%. We use this rate as discount rate for leases commenced in July 2022 and thereafter. The weighted-average discount rate is 3.17%. The weighted-average remaining lease term is 8.0 years.

 

The following table reconciles the undiscounted future lease payments for operating leases to the operating lease liabilities recorded in the condensed consolidated balance sheets on October 30, 2022:

 

   

Undiscounted Future

Operating Lease Payments

 

Remainder of 2023

  $ 2,152  

2024

    8,523  

2025

    8,549  

2026

    8,516  

2027

    8,167  

2028 and thereafter

    26,218  

Total lease payments

  $ 62,125  

Less: impact of discounting

    (7,699 )

Present value of lease payments

  $ 54,426  

 

As of October 30, 2022, the Company had an additional lease for a showroom in High Point, North Carolina. This lease was commenced in November 2022 with an initial lease term of 10 years and estimated future minimum rental commitments of approximately $23.7 million. Since the lease was not commenced as of October 30, 2022, the undiscounted amounts are not included in our financial statements or in the table above.

 

11.         Debt

 

On July 26, 2022, we entered into the Fourth Amendment to the Second Amended and Restated Loan Agreement (the “Amendment”) with Bank of America, N.A. (“BofA”) to replenish cash used to make the Acquisition. The Second Amended and Restated Loan Agreement dated as of September 29, 2017, had previously been amended by a First Amendment to Second Amended and Restated Loan Agreement dated as of January 31, 2019, a Second Amendment to Second Amended and Restated Loan Agreement dated as of November 4, 2020, and a Third Amendment to Second Amended and Restated Loan Agreement dated as of January 27, 2021 (as so amended, the “Existing Loan Agreement”).

 

Details of the individual credit facilities provided for in the Amendment are as follows:

 

 

Unsecured Revolving Credit Facility. Under the Amendment, the expiration date of the existing $35 million Unsecured Revolving Credit Facility (the “Existing Revolver”) was extended to July 26, 2027. Any amounts outstanding will bear interest at a rate per annum, equal to the then current Bloomberg Short-Term Bank Yield Index (“BSBY”) (adjusted periodically) plus 1.00%. The interest rate will be adjusted on a monthly basis. The actual daily amount of undrawn letters of credit is subject to a quarterly fee equal to a per annum rate of 1%. 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;

 

 

 

2022 Secured Term Loan. The Amendment provided us with a $18 million term loan (the “Secured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly interest only payments at a rate per annum equal to the then current BSBY rate (adjusted periodically) plus 0.90% on the outstanding balance until the principal is paid in full. The interest rate will be adjusted on a monthly basis. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest. The Secured Term Loan is secured by certain company-owned life insurance policies under a Security Agreement (Assignment of Life Insurance Policy as Collateral) dated July 26, 2022, by and between the Company and BofA; and

 

 

2022 Unsecured Term Loan. The Amendment provided us with a $7 million unsecured term loan (the “Unsecured Term Loan”), which was disbursed to us on July 26, 2022. We are required to pay monthly principal payments of $116,667 and monthly interest payments at a rate per annum equal to the then current BSBY (adjusted periodically) plus 1.40% on the outstanding balance until paid in full. The interest rate will be adjusted monthly. On July 26, 2027, the entire outstanding indebtedness is due in full, including all principal and interest.

 

We may prepay any outstanding principal amounts borrowed under either the Secured Term Loan or the Unsecured Term Loan at any time, without penalty provided that any payment is accompanied by all accrued interest owed. As of October 30, 2022, $6.6 million was outstanding under the Unsecured Term Loan, $18 million was outstanding under the Secured Term Loan.

 

We incurred $37,500 in debt issuance costs in connection with our term loans. As of October 30, 2022, unamortized loan costs of $35,625 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

 

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

 

 

Maintain a ratio of funded debt to EBITDA not exceeding:

 

 

o

2.50:1.0 through July 30, 2023;

 

o

2.25:1.0 through July 30, 2024; and

 

o

2.00:1.00 thereafter.

 

The other financial covenants under the Existing Loan Agreement continue to apply to us, including a basic fixed charge coverage ratio of at least 1.25:1.00 and limit capital expenditures to no more than $15.0 million during any fiscal year. The Existing 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 Existing 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 Existing Loan Agreement.

 

We were in compliance with each of these financial covenants at October 30, 2022 and expect to remain in compliance with existing covenants through fiscal 2023 and for the foreseeable future.

 

During the fiscal 2023 second quarter, we drew $30.3 million under our $35 million Existing Revolver to cover working capital needs driven by finished goods inventory purchases from our Asian suppliers but had repaid such amounts by the end of the quarter due in part to receiving the proceeds from the Secured Term Loan and Unsecured Term Loan. During the fiscal 2023 third quarter, we drew $5.9 million from the Existing Revolver but repaid such amounts by the end of the quarter. As of October 30, 2022, we had $26.4 million available under our $35 million Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $8.6 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 30, 2022. There were no additional borrowings outstanding under the Existing Revolver as of October 30, 2022.

 

12.          Earnings Per Share

 

We refer you to the discussion of Earnings Per Share in Note 2. Summary of Significant Accounting Policies, in the financial statements included in our 2022 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 30,

   

January 30,

 
   

2022

   

2022

 
                 

Restricted shares

    135       60  

RSUs and PSUs

    139       78  
      274       138  

 

All restricted shares, RSUs and PSUs awarded that have not yet vested are considered when computing diluted earnings per share.

 

During the fiscal 2023 nine-month period, we purchased and retired 598,000 shares of our common stock (at an average price of $15.63 per share) under the $20 million share repurchase authorization approved by our board of directors in the second quarter. These repurchases reduced our total outstanding shares and, consequently, reduced the weighted outstanding shares used in our calculation of earnings per share for the fiscal 2023 third quarter and year-to-date periods shown below.

 

The following table sets forth the computation of basic and diluted earnings/(loss) per share:

 

   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30,

   

October 31,

   

October 30,

   

October 31,

 
   

2022

   

2021

   

2022

   

2021

 
                                 

Net income/(loss)

  $ 4,841     $ (1,219

)

  $ 13,566     $ 15,691  

Less: Unvested participating restricted stock dividends

    28       11       74       34  

Net earnings allocated to unvested participating restricted stock

    58       -       141       84  

Earnings/(Loss) available for common shareholders

    4,755       (1,230

)

    13,351       15,573  
                                 

Weighted average shares outstanding for basic earnings per share

    11,465       11,863       11,736       11,849  

Dilutive effect of unvested restricted stock, RSU and PSU awards

    60       -       102       168  

Weighted average shares outstanding for diluted earnings per share

    11,525       11,863       11,838       12,017  
                                 

Basic earnings/(loss) per share

  $ 0.42     $ (0.10

)

  $ 1.16     $ 1.32  
                                 

Diluted earnings/(loss) per share

  $ 0.42     $ (0.10

)

  $ 1.14     $ 1.30  

 

 

13.         Income Taxes

 

We recorded income tax expense of $1.3 million for the fiscal 2023 third quarter compared to income tax benefit of $403,000 for the comparable prior year quarter. The effective tax rates for the fiscal 2023 and 2022 third quarters were 21.6% and 24.8%, respectively. For the fiscal 2023 nine-month period, we recorded income tax expense of $3.9 million, compared to $4.6 million for the comparable prior year period. The effective tax rates for the fiscal 2023 and 2022 nine-month periods were both 22.5%.

 

No material and non-routine positions have been identified that are uncertain tax positions.

 

Tax years ending February 3, 2019 through January 30, 2022 remain subject to examination by federal and state taxing authorities.

 

14.          Segment Information

 

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

 

 

better understand our performance;

 

better assess our prospects for future net cash flows; and

 

make more informed judgments about us as a whole.

 

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

 

For financial reporting purposes, we are organized into three reportable segments and “All Other”, which includes the remainder of our businesses:

 

 

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

 

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

 

Domestic Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore, Shenandoah Furniture and newly acquired Sunset West; and

 

All Other, consisting of H Contract and Lifestyle Brands. Neither of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

 

Changes to segment reporting for fiscal 2023

 

We regularly monitor our reportable segments for changes in facts and circumstances to determine whether changes in the identification or aggregation of operating segments are necessary. 

 

Before the fiscal 2023 first quarter, H Contract’s results included sales of seating products sourced from Sam Moore. Due to a change in the way management internally evaluates operating performance, beginning with fiscal 2023 first quarter Sam Moore’s results now include sales of seating products formerly included in H Contract’s results. Fiscal 2022 results discussed below have been recast to reflect this change. The Hooker Branded and Home Meridian segments are unchanged.

 

As discussed in Note 3 above, we acquired substantially all the assets of Sunset West on the first day of the 2023 fiscal year. Based on our analysis and the requirements of ASC 280: Segment Reporting, Sunset West’s results are included in the Domestic Upholstery segment on a prospective basis.

 

 

The following table presents segment information for the periods, and as of the dates, indicated. Prior-year information has been recast to reflect the change discussed above.

 

   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30,

           

October 31,

           

October 30,

           

October 31,

         
   

2022

           

2021

           

2022

           

2021

         
           

% Net

           

% Net

           

% Net

           

% Net

 

Net Sales

         

Sales

           

Sales

           

Sales

           

Sales

 

Hooker Branded

  $ 54,696       36.1 %   $ 56,037       42.0 %   $ 149,743       33.1 %   $ 157,304       34.3 %

Home Meridian

    50,588       33.3 %     46,230       34.6 %     171,721       38.1 %     217,964       47.5 %

Domestic Upholstery

    43,436       28.7 %     29,302       22.0 %     122,982       27.2 %     78,387       17.1 %

All Other

    2,860       1.9 %     1,859       1.4 %     7,357       1.6 %     5,152       1.1 %

Consolidated

  $ 151,580       100 %   $ 133,428       100 %   $ 451,803       100 %   $ 458,807       100 %
                                                                 

Gross Profit/(Loss)

                                                               

Hooker Branded

  $ 15,510       28.4 %   $ 15,366       27.4 %   $ 44,348       29.6 %   $ 49,639       31.6 %

Home Meridian

    5,431       10.7 %     (1,807 )     -3.9 %     19,057       11.1 %     17,935       8.2 %

Domestic Upholstery

    9,918       22.8 %     5,782       19.7 %     26,400       21.5 %     15,936       20.3 %

All Other

    1,149       40.2 %     666       35.8 %     2,717       36.9 %     1,796       34.9 %

Consolidated

  $ 32,008       21.1 %   $ 20,007       15.0 %   $ 92,522       20.5 %   $ 85,306       18.6 %
                                                                 

Operating Income/(Loss)

                                                               

Hooker Branded

  $ 5,217       9.5 %   $ 6,669       11.9 %   $ 15,431       10.3 %   $ 25,040       15.9 %

Home Meridian

    (3,205 )     -6.3 %     (10,181 )     -22.0 %     (7,290 )     -4.2 %     (9,274 )     -4.3 %

Domestic Upholstery

    3,823       8.8 %     1,589       5.4 %     8,288       6.7 %     3,890       5.0 %

All Other

    583       20.4 %     195       10.5 %     1,204       16.4 %     519       10.1 %

Consolidated

  $ 6,418       4.2 %   $ (1,728 )     -1.3 %   $ 17,633       3.9 %   $ 20,175       4.4 %
                                                                 

Capital Expenditures (net of disposals)

                                                               

Hooker Branded

  $ 589             $ 306             $ 1,295             $ 427          

Home Meridian

    589               2,501               1,221               4,956          

Domestic Upholstery

    344               344               953               1,233          

All Other

    -               10               -               10          

Consolidated

  $ 1,522             $ 3,161             $ 3,469             $ 6,626          
                                                                 

Depreciation

& Amortization

                                                               

Hooker Branded

  $ 479             $ 645             $ 1,600             $ 1,844          

Home Meridian

    724               710               2,110               1,779          

Domestic Upholstery

    963               682               2,860               1,991          

All Other

    3               3               8               9          

Consolidated

  $ 2,169             $ 2,040             $ 6,578             $ 5,623          

 

   

As of October 30,

           

As of January 30,

                                         
   

2022

   

%Total

   

2022

   

%Total

                                 

Identifiable Assets

         

Assets

           

Assets

                                 

Hooker Branded

  $ 155,965       44.2 %   $ 170,968       48.8 %                                

Home Meridian

    129,984       36.9 %     130,890       37.4 %                                

Domestic Upholstery

    64,884       18.4 %     47,232       13.5 %                                

All Other

    1,797       0.5 %     1,126       0.3 %                                

Consolidated

  $ 352,630       100 %   $ 350,216       100 %                                

Consolidated Goodwill and Intangibles

    47,621               24,343                                          

Total Consolidated Assets

  $ 400,251             $ 374,559                                          

 

 

Sales by product type are as follows:

 

   

Net Sales (in thousands)

 
   

Thirteen Weeks Ended

   

Thirty-Nine Weeks Ended

 
   

October 30, 2022

   

%Total

   

October 31, 2021

   

%Total

   

October 30, 2022

   

%Total

   

October 31, 2021

   

%Total

 

Casegoods

  $ 86,717       57 %   $ 75,982       57 %   $ 253,748       56 %   $ 271,421       59 %

Upholstery

    64,863       43 %     57,446       43 %     198,055       44 %     187,386       41 %
    $ 151,580       100 %   $ 133,428