Company Quick10K Filing
Quick10K
Hooker Furniture
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.16 12 $203
10-Q 2019-08-04 Quarter: 2019-08-04
10-Q 2019-05-05 Quarter: 2019-05-05
10-K 2019-02-03 Annual: 2019-02-03
10-Q 2018-10-28 Quarter: 2018-10-28
10-Q 2018-07-29 Quarter: 2018-07-29
10-Q 2018-04-29 Quarter: 2018-04-29
10-K 2018-01-28 Annual: 2018-01-28
10-Q 2017-10-29 Quarter: 2017-10-29
10-Q 2017-07-30 Quarter: 2017-07-30
10-Q 2017-04-30 Quarter: 2017-04-30
10-K 2017-01-29 Annual: 2017-01-29
10-Q 2016-10-30 Quarter: 2016-10-30
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-05-01 Quarter: 2016-05-01
10-K 2016-01-31 Annual: 2016-01-31
10-Q 2015-11-01 Quarter: 2015-11-01
10-Q 2015-08-02 Quarter: 2015-08-02
10-Q 2015-05-03 Quarter: 2015-05-03
10-K 2015-02-01 Annual: 2015-02-01
10-Q 2014-11-02 Quarter: 2014-11-02
10-Q 2014-08-03 Quarter: 2014-08-03
10-Q 2014-05-04 Quarter: 2014-05-04
10-K 2014-02-02 Annual: 2014-02-02
8-K 2019-09-05 Earnings, Exhibits
8-K 2019-06-12 Officers, Shareholder Vote
8-K 2019-06-12 Earnings, Exhibits
8-K 2019-04-17 Officers
8-K 2019-04-16 Earnings, Exhibits
8-K 2018-12-06 Earnings, Exhibits
8-K 2018-08-30 Earnings, Exhibits
8-K 2018-06-05 Shareholder Vote
8-K 2018-06-05 Earnings, Exhibits
8-K 2018-05-07 Officers, Exhibits
8-K 2018-04-24 Regulation FD, Exhibits
8-K 2018-04-05 Earnings, Exhibits
MHK Mohawk Industries 8,197
HELE Helen of Troy 3,685
CODI Compass Diversified Holdings 1,121
CSWI CSW Industrials 996
HOME At Home Group 429
TTS Tile Shop Holdings 143
BSET Bassett Furniture Industries 131
FLXS Flexsteel Industries 123
DXYN Dixie Group 20
PRPL Purple Innovation 0
HOFT 2019-08-04
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits
EX-31.1 ex_157476.htm
EX-31.2 ex_157477.htm
EX-32.1 ex_157478.htm

Hooker Furniture Earnings 2019-08-04

HOFT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 hookerfurn20190804_10q.htm FORM 10-Q hookerfurn20190804_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 August 4, 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 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 September 6, 2019, there were 11,838,367 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

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

31

 

 

 

Item 4.

Controls and Procedures

32

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

33

 

 

 

Signature

34

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

As of

 

August 4,

   

February 3,

 
   

2019

   

2019

 
   

(unaudited)

         

Assets

               

Current assets

               

    Cash and cash equivalents

  $ 13,289     $ 11,435  

    Trade accounts receivable, net

    86,298       112,557  

    Inventories

    113,593       105,204  

    Income tax recoverable

    3,856       -  

    Prepaid expenses and other current assets

    6,966       5,735  

         Total current assets

    224,002       234,931  

Property, plant and equipment, net

    30,925       29,482  

Cash surrender value of life insurance policies

    24,763       23,816  

Deferred taxes

    2,349       4,522  

Operating leases right-of-use assets

    42,536       -  

Intangible assets, net

    34,563       35,755  

Goodwill

    40,058       40,058  

Other assets

    1,414       1,152  

         Total non-current assets

    176,608       134,785  

               Total assets

  $ 400,610     $ 369,716  
                 

Liabilities and Shareholders’ Equity

               

Current liabilities

               

    Current portion of term loans

  $ 5,846     $ 5,829  

    Trade accounts payable

    31,829       40,838  

    Accrued salaries, wages and benefits

    5,146       8,002  

    Income tax accrual

    -       3,159  

    Customer deposits

    5,498       3,023  

    Current portion of lease liabilities

    6,447       -  

    Other accrued expenses

    4,597       3,564  

         Total current liabilities

    59,363       64,415  

Long term debt

    26,697       29,628  

Deferred compensation

    10,847       11,513  

Lease liabilities

    36,567       -  

Other long-term liabilities

    3       984  

Total long-term liabilities

    74,114       42,125  

              Total liabilities

    133,477       106,540  
                 

Shareholders’ equity

               

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

11,838 and 11,785 shares issued and outstanding on each date

    50,844       49,549  

    Retained earnings

    215,986       213,380  

    Accumulated other comprehensive income

    303       247  

              Total shareholders’ equity

    267,133       263,176  

                   Total liabilities and shareholders’ equity

  $ 400,610     $ 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

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

Aug 4,

   

July 29,

   

Aug 4,

   

July 29,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net sales

  $ 152,248     $ 168,661     $ 287,766     $ 311,553  
                                 

Cost of sales

    123,422       132,516       233,423       243,442  

Casualty loss

    -       500       -       500  

Total Cost of sales

    123,422       133,016       233,423       243,942  
                                 

      Gross profit

    28,826       35,645       54,343       67,611  
                                 

Selling and administrative expenses

    22,462       23,184       44,478       45,171  

Intangible asset amortization

    596       596       1,192       1,192  
                                 

        Operating income

    5,768       11,865       8,673       21,248  
                                 

Other (expense)/income, net

    (32 )     73       (94 )     77  

Interest expense, net

    328       364       669       745  
                                 

      Income before income taxes

    5,408       11,574       7,910       20,580  
                                 

Income tax expense

    1,248       2,881       1,763       4,730  
                                 

       Net income

  $ 4,160     $ 8,693     $ 6,147     $ 15,850  
                                 

Earnings per share

                         

       Basic

  $ 0.35     $ 0.74     $ 0.52     $ 1.35  

       Diluted

  $ 0.35     $ 0.74     $ 0.52     $ 1.34  
                                 

Weighted average shares outstanding:

                         

       Basic

    11,787       11,760       11,778       11,755  

       Diluted

    11,810       11,784       11,811       11,775  
                                 

Cash dividends declared per share

  $ 0.15     $ 0.14     $ 0.30     $ 0.28  

 

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

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited) 

 

   

For the

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

Aug 4,

   

July 29,

   

Aug 4,

   

July 29,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net Income

  $ 4,160     $ 8,693     $ 6,147     $ 15,850  

       Other comprehensive income (loss):

                               

                 Amortization of actuarial loss

    37       43       74       86  

                 Income tax effect on amortization

    (9 )     (10 )     (18 )     (21 )

        Adjustments to net periodic benefit cost

    28       33       56       65  

        Reclassification of tax effects due to the

             adoption of ASU 2018-02

    -       -       -       111  
                                 

Total Comprehensive Income

  $ 4,188     $ 8,726     $ 6,203     $ 16,026  

 

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

 

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

   

For the

 
   

Twenty-Six Weeks Ended

 
   

Aug 4,

   

July 29,

 
   

2019

   

2018

 

Operating Activities:

         

Net income

  $ 6,147     $ 15,850  

Adjustments to reconcile net income to net cash

provided by operating activities:

               

Depreciation and amortization

    3,471       3,689  

Gain on disposal of assets

    (285 )     (48 )

Deferred income tax expense

    2,155       748  

Noncash restricted stock and performance awards

    558       548  

Provision/(benefit from) for doubtful accounts and sales allowances

    1,053       (785 )

Gain on life insurance policies

    (624 )     (504 )
   Changes in assets and liabilities:                

Trade accounts receivable

    25,206       10,842  

Inventories

    (8,389 )     (14,584 )

Income tax recoverable

    (3,856 )     -  

Prepaid expenses and other current assets

    (3,191 )     (672 )

Trade accounts payable

    (9,058 )     4,281  

Accrued salaries, wages, and benefits

    (2,856 )     (1,804 )

Accrued income taxes

    (3,159 )     (3,719 )

Customer deposits

    2,475       798  

Operating lease liabilities

    187       -  

Other accrued expenses

    1,033       702  

Deferred compensation

    145       42  

Other long-term liabilities

    -       81  

              Net cash provided by operating activities

  $ 11,012     $ 15,465  
                 

Investing Activities:

         

Purchases of property and equipment

    (3,659 )     (833 )

Proceeds received from sale of assets

    1,459       70  

Proceeds received on life insurance policies

    -       1,225  

Premiums paid on life insurance policies

    (489 )     (529 )

              Net cash used in investing activities

    (2,689 )     (67 )
                 
Financing Activities:                

Payments for long-term debt

    (2,928 )     (13,786 )

Cash dividends paid

    (3,541 )     (3,296 )

              Net cash used in financing activities

    (6,469 )     (17,082 )
                 

Net increase/(decrease) in cash and cash equivalents

    1,854       (1,684 )

Cash and cash equivalents - beginning of year

    11,435       30,915  

Cash and cash equivalents - end of quarter

  $ 13,289     $ 29,231  
                 

Supplemental disclosure of cash flow information:

         

Cash paid for income taxes

  $ 6,622     $ 7,699  

Cash paid for interest, net

    599       632  
Non-cash transactions:                

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

  $ 266     $ -  

Increase in property and equipment through accrued purchases

    49       20  

 

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

                    15,850               15,850  

Prior year adjustment for ASU 2014-09 and 2018-02

                    99       111       210  

Unrealized loss on defined benefit plan, net of tax of $21

                            65       65  

Cash dividends paid and accrued ($0.14 per share)

                    (3,296 )             (3,296 )

Restricted stock grants, net of forfeitures

    23       (29 )                     (29 )

Restricted stock compensation cost

            283                       283  

      Balance at July 29, 2018

    11,785     $ 49,224     $ 192,775     $ 544     $ 242,543  
                                         
                                         
                                         
                                         

      Balance at February 3, 2019

    11,785     $ 49,549     $ 213,380     $ 247     $ 263,176  

Net income

                    6,147               6,147  

Unrealized loss on defined benefit plan, net of tax of $18

                            56       56  

Cash dividends paid and accrued ($0.15 per share)

                    (3,541 )             (3,541 )

Restricted stock grants, net of forfeitures

    53       344                       344  

Restricted stock compensation cost

            367                       367  

Recognition of PSUs as equity-based awards

            584                       584  

      Balance at August 4, 2019

    11,838     $ 50,844     $ 215,986     $ 303     $ 267,133  

 

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

 

 

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)

(Unaudited)

For the Twenty-Six Weeks Ended August 4, 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. Certain information and footnote disclosures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) are condensed or omitted pursuant to SEC rules and regulations. However, we believe that the disclosures made are adequate for a fair presentation of our results of operations and financial position. These financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the fiscal year ended February 3, 2019 (“2019 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

 

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 6, 2019, and the twenty-six week period (also referred to as “six months”, “six-month period” or “first half”) that began February 4, 2019, which both ended August 4, 2019. This report discusses our results of operations for this period compared to the 2019 fiscal year thirteen-week period that began April 30, 2018 and the twenty-six week period that began January 29, 2018, which both ended July 29, 2018; and our financial condition as of August 4, 2019 compared to 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 ended February 3, 2019.

 

2.

Recently Adopted Accounting Policies

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (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 lease liabilities and corresponding lease assets on the condensed consolidated balance sheets. In addition, we have elected the package of practical expedients, which allowed us not to reassess prior conclusions related to the expired or existing leases, and not to reassess the accounting for initial direct costs. As a result of the adoption of Topic 842, we have operating lease right-of-use assets of $42.5 million and operating lease liabilities of $43.0 million as of August 4, 2019. The adoption of Topic 842 did not have a material impact on our condensed consolidated statements of income and condensed consolidated statement of cash flows for the three-month or six-month period ended August 4, 2019. See Note 8 for additional information and disclosures required by Topic 842.

 

3.

Accounts Receivable

 

   

August 4,

   

February 3,

 
   

2019

   

2019

 
                 

Trade accounts receivable

  $ 90,142     $ 117,732  

Other accounts receivable allowances

    (3,103 )     (4,267 )

Allowance for doubtful accounts

    (741 )     (908 )

   Accounts receivable

  $ 86,298     $ 112,557  

 

 

4.

Inventories

 

 

   

August 4,

   

February 3,

 
   

2019

   

2019

 

Finished furniture

  $ 123,724     $ 112,847  

Furniture in process

    1,361       1,825  

Materials and supplies

    9,867       10,896  

   Inventories at FIFO

    134,952       125,568  

Reduction to LIFO basis

    (21,359 )     (20,364 )

   Inventories

  $ 113,593     $ 105,204  

 

5.

Property, Plant and Equipment

 

   

Depreciable Lives

   

August 4,

   

February 3,

 
   

(In years)

   

2019

   

2019

 
                       

Buildings and land improvements

  15 - 30     $ 25,058     $ 24,588  

Computer software and hardware

  3 - 10       18,981       18,719  

Machinery and equipment

  10       9,320       8,934  

Leasehold improvements

 

Term of lease

      9,443       9,376  

Furniture and fixtures

  3 - 10       2,433       2,318  

Other

  5       665       665  

   Total depreciable property at cost

      65,900       64,600  

Less accumulated depreciation

          41,942       39,925  

   Total depreciable property, net

          23,958       24,675  

Land

          1,067       1,067  

Construction-in-progress

          5,900       3,740  

   Property, plant and equipment, net

    $ 30,925     $ 29,482  

 

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 August 4, 2019 and 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.

 

On January 30, 2019, our Board of Directors voted to terminate the Pension Plan. Pension Plan termination is an eighteen to twenty-four-month process, that involves seeking certain approvals from both the IRS and Pension Benefit Guaranty Corporation (“PBGC”). As of February 3, 2019, current Pension Plan assets are invested in bond funds and are measured at fair value using Level 1 inputs, which are quoted prices in active markets. As of February 3, 2019, the funded status for this plan was $86,000 shown on the “Other assets” line of our condensed consolidated balance sheets. See Note 10. Employee Benefit Plans for additional information about the Plan.

 

 

Our assets measured at fair value on a recurring basis at August 4, 2019 and February 3, 2019, were as follows:

 

   

Fair value at August 4, 2019

   

Fair value at February 3, 2019

 

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

  $ -     $ 24,763     $ -     $ 24,763     $ -     $ 23,816     $ -     $ 23,816  

Pension Plan assets*

    10,992       -       -       10,992       10,992       -       -       10,992  

 

* as of February 3, 2019 for Pension Plan assets.

 

7.

Intangible Assets

  

         

August 4,

   

February 3,

 

Non-amortizable Intangible Assets

Segment

 

2019

   

2019

 

Goodwill

 

Home Meridian

  $ 23,187     $ 23,187  

Goodwill

 

All Other

    16,871       16,871  

   Total Goodwill

    40,058       40,058  
                       

Trademarks and trade names - Home Meridian

Home Meridian

    11,400       11,400  

Trademarks and trade names - Bradington-Young

All Other

    861       861  

Trademarks and trade names - Sam Moore

All Other

    396       396  

   Total Trademarks and trade names

  $ 12,657     $ 12,657  
                       

   Total non-amortizable assets

  $ 52,715     $ 52,715  

 

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 February 3, 2019

  $ 22,320     $ 778     $ 23,098  

Amortization

    (1,162 )     (30 )     (1,192 )

Balance at August 4, 2019

  $ 21,158     $ 748     $ 21,906  

 

For the remainder of fiscal 2020, amortization expense is expected to be approximately $1.2 million.

 

8.

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 $87,000 and $217,000 sub-lease income for the three-month and six-month period ended August 4, 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 six-month periods ended August 4, 2019 were:

 

   

13 Weeks Ended

   

26 Weeks Ended

 
   

August 4, 2019

   

August 4, 2019

 

Operating lease cost

  $ 2,123     $ 4,200  

Short-term lease cost

    178       291  

Total operating lease cost

  $ 2,301     $ 4,491  
                 

Operating cash outflows

  $ 1,948     $ 4,334  

 

The right-of-use assets and lease liabilities recorded on our Condensed Consolidated Balance Sheets as of August 4, 2019 were:

 

   

August 4, 2019

 

Real estate

  $ 41,308  

Property and equipment

    1,228  

Total operating leases right-of-use assets

  $ 42,536  
         
         

Current portion of operating lease liabilities

  $ 6,447  

Long term operating lease liabilities

    36,567  

Total operating lease liabilities

  $ 43,014  

 

Weighted-average remaining lease term is 7.7 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 August 4, 2019:

 

   

Undiscounted Future

Operating Lease Payments

 

Remainder of 2019

  $ 4,069  

2020

    7,728  

2021

    7,112  

2022

    5,518  

2023

    5,266  

2024 and thereafter

    20,396  

Total lease payments

  $ 50,089  

Less: impact of discounting

    (7,075 )

Present value of lease payments

  $ 43,014  

 

As of August 4, 2019, we did not have any additional operating or finance leases that had not yet commenced.

 

9.

Long-Term Debt

 

As of August 4, 2019, we had an aggregate $27.8 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $2.2 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of August 4, 2019. There were no additional borrowings outstanding under the revolving credit facility as of August 4, 2019.    

 

10.

Employee Benefit Plans

 

We maintain three retirement plans for the benefit of certain former and current employees, including a supplemental retirement income plan (“SRIP”) for certain former and current employees of Hooker Furniture Corporation, as well as two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, 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. Pension Plan termination is an eighteen to twenty-four-month process, that involves seeking certain approvals from both the IRS and PBGC. Once we receive the appropriate approvals, an insurance company will be selected to provide annuities for participants at an amount equal to their current monthly pension benefit. Upon settlement of the pension liability, we will reclassify the related pension losses currently recorded in accumulated other comprehensive loss, to the consolidated statements of operations. We expect to record pension settlement expenses and excess costs, if any, to terminate the plan. We do not expect these expenses and costs to be material.

 

 

As of August 4, 2019, current Pension Plan assets are invested in bond funds and are measured at fair value using Level 1 inputs, which are quoted prices in active markets.

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 4,

   

July 29,

   

August 4,

   

July 29,

 
   

2019

   

2018

   

2019

   

2018

 

Net periodic benefit costs

                               

      Service cost

    26       81       52       163  

      Interest cost

    204       206       409       413  

      Actuarial loss

    37       43       74       86  

      Expected return on pension plan assets

    (101 )     (144 )     (202 )     (288 )

      Expected administrative expenses

    98       70       195       140  
                                 

Consolidated net periodic benefit costs

  $ 264     $ 256     $ 528     $ 514  

 

The expected long-term rate of return on Pension Plan assets is 3.8% as of the Pension Plan’s most recent valuation date of February 3, 2019.

 

The SRIP and SERP plans are unfunded plans. We paid $171,000 in the second quarter and $349,000 in the first half. We expect to pay a total of approximately $335,000 in benefit payments from our general assets during the remainder of fiscal 2020 to fund SRIP and SERP payments.

 

11.

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 2019 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:

 

   

August 4,

   

February 3,

 
   

2019

   

2019

 
                 

Restricted shares

    49       22  

RSUs and PSUs

    78       36  
      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 PSUs awarded that have not yet vested are considered when computing diluted earnings per share. The following table sets forth the computation of basic and diluted earnings per share:

 

               

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
               

August 4,

   

July 29,

   

August 4,

   

July 29,

 
               

2019

   

2018

   

2019

   

2018

 
                                             

Net income

  $ 4,160     $ 8,693     $ 6,147     $ 15,850  

Less: Unvested participating restricted stock dividends

    7       3       10       5  

           Net earnings allocated to unvested participating restricted stock

    15       16       18       24  

Earnings available for common shareholders

    4,138       8,674       6,119       15,821  
                                             

Weighted average shares outstanding for basic earnings per share

    11,787       11,760       11,778       11,755  

Dilutive effect of unvested restricted stock, RSU and PSU awards

    23       24       33       20  

   Weighted average shares outstanding for diluted earnings per share

    11,810       11,784       11,811       11,775  
                                             

Basic earnings per share

  $ 0.35     $ 0.74     $ 0.52     $ 1.35  
                                             

Diluted earnings per share

  $ 0.35     $ 0.74     $ 0.52     $ 1.34  

 

12.

Income Taxes

 

We recorded income tax expense of $1.2 million for the fiscal 2020 second quarter compared to $2.9 million for the comparable prior year period. The effective tax rates for the fiscal 2020 and 2019 second quarters were 23.1% and 24.9%, respectively. The effective tax rates for the first half of fiscal 2020 and 2019 were 22.3% and 23.0%.

 

The net unrecognized tax benefits as of August 4, 2019 and February 3, 2019, which, if recognized, would affect our effective tax rate are $39,000 and $38,000, respectively.

 

Tax years ending January 31, 2016 through February 3, 2019 remain subject to examination by federal and state taxing authorities.

 

13.

Segment Information

 

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

 

 

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

 

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

 

All Other, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore, Shenandoah Furniture and H Contract. None of these operating segments were individually reportable; therefore, we combined them in “All Other” in accordance with ASC 280.

 

 

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

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 4, 2019

           

July 29, 2018

           

August 4, 2019

           

July 29, 2018

         
           

% Net

           

% Net

           

% Net

           

% Net

 

Net Sales

         

Sales

           

Sales

           

Sales

           

Sales

 

   Hooker Branded

  $ 39,405       25.9 %   $ 40,551       24.0 %   $ 79,004       27.5 %   $ 83,322       26.7 %

   Home Meridian

    87,188       57.3 %     101,022       59.9 %     154,818       53.8 %     171,618       55.1 %

   All Other

    25,655       16.8 %     27,088       16.1 %     53,944       18.7 %     56,613       18.2 %

Consolidated

  $ 152,248       100.0 %   $ 168,661       100.0 %   $ 287,766       100.0 %   $ 311,553       100.0 %
                                                                 

Gross Profit

                                                               

   Hooker Branded

  $ 11,820       30.0 %   $ 12,616       31.1 %   $ 24,376       30.9 %   $ 27,038       32.5 %

   Home Meridian

    10,951       12.6 %     17,398       17.2 %     16,854       10.9 %     27,814       16.2 %

   All Other

    6,055       23.6 %     5,631       20.8 %     13,113       24.3 %     12,759       22.5 %

Consolidated

  $ 28,826       18.9 %   $ 35,645       21.1 %   $ 54,343       18.9 %   $ 67,611       21.7 %
                                                                 

Operating Income

                                                               

   Hooker Branded

  $ 4,088       10.4 %   $ 4,943       12.2 %   $ 9,265       11.7 %   $ 11,669       14.0 %

   Home Meridian

    (66 )     -0.1 %     5,628       5.6 %     (5,059 )     -3.3 %     5,339       3.1 %

   All Other

    1,746       6.8 %     1,294       4.8 %     4,467       8.3 %     4,240       7.5 %

Consolidated

  $ 5,768       3.8 %   $ 11,865       7.0 %   $ 8,673       3.0 %   $ 21,248       6.8 %
                                                                 

Capital Expenditures

                                                               

   Hooker Branded

  $ 386             $ 168             $ 511             $ 378          

   Home Meridian

    57               122               173               158          

   All Other

    1,690               173               2,975               297          

Consolidated

  $ 2,133             $ 463             $ 3,659             $ 833          
                                                                 

Depreciation

   & Amortization

                                                               

   Hooker Branded

  $ 490             $ 496             $ 982             $ 980          

   Home Meridian

    547               601               1,078               1,192          

   All Other

    718               764               1,411               1,517          

Consolidated

  $ 1,755             $ 1,861             $ 3,471             $ 3,689          

 

   

As of August 4,

                                           

As of February 3,

         
   

2019

   

%Total

                                   

2019

   

%Total

 

Identifiable Assets

         

Assets

                                           

Assets

 

   Hooker Branded

  $ 137,566       42.2 %                                   $ 108,445       36.9 %

   Home Meridian

    148,692       45.6 %                                     144,277       49.1 %

   All Other

    39,731       12.2 %                                     41,181       14.0 %

Consolidated

  $ 325,989       100.0 %                                   $ 293,903       100.0 %

   Consolidated Goodwill and Intangibles

    74,621                                               75,813          

Total Consolidated Assets

  $ 400,610                                             $ 369,716          

 

 

Sales by product type are as follows:

 

   

Net Sales (in thousands)

 
   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 4, 2019

   

%Total

   

July 29, 2018

   

%Total

   

August 4, 2019

   

%Total

   

July 29, 2018

   

%Total

 

Casegoods

  $ 98,488       65 %   $ 105,703       63 %   $ 182,954       64 %   $ 195,759       63 %

Upholstery

    53,760       35 %     62,958       37 %     104,812       36 %     115,794       37 %
    $ 152,248       100 %   $ 168,661       100 %   $ 287,766       100 %   $ 311,553       100 %

 

14.

Subsequent Events

 

Dividends

 

On September 4, 2019, our board of directors declared a quarterly cash dividend of $0.15 per share, payable on September 30, 2019 to shareholders of record at September 16, 2019.

 

 

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. 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 25% tariff on certain goods imported into the United States from China, including almost all furniture and furniture components manufactured in China, with the potential for additional or increased tariffs in the future;

 

 

sourcing transitions away from China, including the lack of adequate manufacturing capacity and skilled labor and longer lead times, due to competition and increased demand for resources in those countries;    

 

 

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;

 

 

risks associated with product defects, including higher than expected costs associated with product quality and safety, and regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products, including product liability claims and costs to recall defective products;

 

 

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 internet or other related issues including unauthorized disclosures of confidential information or inadequate levels of cyber-insurance or risks not covered by cyber insurance;

 

 

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, ocean freight costs and warehousing costs and the risk that a disruption in our offshore suppliers could adversely affect our ability to timely fill customer orders;

 

 

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;

 

 

risks related to our other defined benefit plans;

 

 

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, fluctuating consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit.

 

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

 

Also, our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward-Looking Statements detailed above and Item 1A, “Risk Factors” in our 2019 annual report on Form 10-K (the “2019 Annual Report”).

 

Investors should also be aware that while we occasionally communicate with securities analysts and others, it is against our policy to selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any projection, forecast or report issued by any analyst regardless of the content of the statement or report, as we have a policy against confirming information issued by others.

 

This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “second quarter” or “quarterly period”) that began May 6, 2019, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 4, 2019, which both ended August 4, 2019. This report discusses our results of operations for this period compared to the 2019 fiscal year thirteen-week period that began April 30, 2018 and the twenty-six week period that began January 29, 2018, which both ended July 29, 2018; and our financial condition as of August 4, 2019 compared to 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 ended February 3, 2019.

 

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 2019 Annual Report. Our 2019 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 2019 Annual Report and our other public filings made with the SEC are available, without charge, at www.sec.gov and at http://investors.hookerfurniture.com.

 

Overview

 

Hooker Furniture Corporation, incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2018 shipments to U.S. retailers, according to a 2019 survey by a leading trade publication.

 

We believe that consumer tastes and channels in which they shop for furniture are evolving at a rapid pace and we continue to change to meet these demands.

 

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

 

We believe our acquisition of Home Meridian has better positioned us in some of the fastest growing and advantaged channels of distribution, including e-commerce, warehouse membership clubs and contract furniture. While growing faster than industry average, these channels tend to operate at lower margins. This acquisition has provided the Home Meridian segment’s leadership with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.

 

We also believe our acquisition of Shenandoah Furniture, a North Carolina-based domestic upholsterer has better positioned us in the “lifestyle specialty” retail distribution channel. For that channel, domestically- produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel. 

 

Executive Summary-Results of Operations

 

Consolidated net sales for fiscal 2020 second quarter decreased $16.4 million or 9.7% as compared to the prior year period, from $168.7 million to $152.2 million due primarily to $13.8 million or 13.7% net sales decrease in the Home Meridian segment. The Hooker Branded segment and All Other net sales decreased $1.1 million and $1.4 million respectively in the second quarter.

 

For the fiscal 2020 first half, consolidated net sales decreased $23.8 million or 7.6% from $311.6 million to $287.8 million as compared to the prior year period due to sales decreases in both of our reportable segments as well as All Other. Home Meridian segment net sales declined by $16.8 million or 9.8%, the Hooker Branded segment net sales decreased $4.3 million or 5.2% and All Other net sales decreased $2.7 million or 4.7%, all as compared to the fiscal 2019 six-month period.

 

Consolidated net income decreased $4.5 million or 52.1% and $9.7 million or 61.2%, as compared to the prior year second quarter and first half, respectively.

 

 

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2020 second quarter and first half results of operations:

 

 

Gross profit. Fiscal 2020 second quarter consolidated gross profit decreased both in absolute terms and as a percentage of net sales, due primarily to decreased gross profit in the Home Meridian segment and to a lesser extent in the Hooker Branded segment, partially offset by the absence of $500,000 casualty loss recorded in the fiscal 2019 second quarter. Despite a sales decrease in the second quarter, All Other continued to improve its gross profit as a percentage of net sales and in absolute terms. For the fiscal 2020 first half, consolidated gross profit decreased both in absolute terms and as a percentage of net sales principally due to decreased gross profit in the Home Meridian segment, as a result of sales declines, higher returns and allowances and increased product-related costs.

 

 

Selling and administrative expenses. Consolidated selling and administrative (“S&A”) expenses decreased in absolute terms but increased as a percentage of net sales in the fiscal 2020 second quarter and first half. S&A expense increased as a percentage of net sales due to lower sales. S&A expenses decreased in absolute terms due to decreased selling expenses and bonus accruals due to lower net sales and profitability, partially offset by the absence of a $1.0 million one-time life insurance gain recorded in fiscal 2019 first quarter.

 

 

Intangible asset amortization expense. Intangible amortization expense on the Home Meridian and Shenandoah acquisition-related intangible assets was unchanged compared to the prior year periods.

 

 

Operating income. Consolidated operating income decreased $6.1 million to $5.8 million and from 7.0% to 3.8% as a percentage of net sales in the fiscal 2020 second quarter. For the fiscal 2020 first half, consolidated operating income decreased $12.6 million to $8.7 million and from 6.8% to 3.0% as a percentage of net sales, due to the factors discussed above and in greater detail in the analysis below.

 

Review

 

The net sales decline which began in the first quarter of fiscal 2020 continued in the second quarter, driven primarily by reduced retail demand and the lingering effects of several quality-related issues in our Home Meridian segment. Reduced demand and soft retail conditions continued to impact the home furnishing industry and affected all operating segments. The Hooker Branded segment and All Other net sales decreased $1.1 million and $1.4 million respectively compared to prior year second quarter, which we believe to be reasonable performance following our fiscal 2020 first quarter results and given current market conditions. In addition to lower sales, gross margins in our Home Meridian segment were negatively affected by tariffs as that segment continues the process of resourcing products away from China.

 

The Hooker Branded segment’s net sales decreased $1.1 million or 2.8% in the fiscal 2020 second quarter, due primarily to a decrease in incoming orders in the Hooker Casegoods division. Hooker Upholstery continued to grow net sales and gross profit, both in the mid-upper single 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 20% compared to fiscal 2019 second quarter. Net sales decreased by lower single digits in Hooker Casegoods, driven by lower consumer demand and softness in the home furnishings industry. Tariffs and higher freight costs also negatively affected the profitability in this segment to some degree. Despite the sales decline and increased product costs, the segment was still highly profitable with over 30% gross margin and 10% operating income margin during the quarter and for the first half. We continue to analyze the tariff’s impacts on our supply chain and are working on resourcing certain products and product lines and increasing prices where appropriate.

 

 

The Home Meridian segment’s net sales decreased $13.8 million or 13.7% in the fiscal 2020 second quarter due primarily to sales decreases in major furniture chains and club accounts, partially offset by steady sales growth in e-commerce and hospitality business. Weak demand in the home furnishings industry and inventory re-balancing due to higher inventory receipts in advance of a tariff increase expected to take effect on January 1, 2019 by our major furniture chain customers led to sales declines in these channels.

 

The Home Meridian segment experienced quality challenges and higher than expected quality allowances in the fiscal 2019 fourth quarter and fiscal 2020 first quarter, which negatively impacted shipping in the fiscal 2020 first half. Home Meridian’s margins were more affected by the tariffs than our other business units due to the nature of its customer base. Large retailers have been less willing to accept price increases, especially on previously placed orders and since much of Home Meridian’s sales volume is container-direct sales from Asia, rather than from US warehouses, tariffs have had a more immediate impact on margins. Segment management are working aggressively on re-sourcing away from China and are working to overcome labor constraints in those countries. We continue to adjust pricing to improve margins and offset excess tariff and freight costs. Warehousing and distribution costs were up due to the costs of storing and handling increased inventory related to decreased orders due to soft retail conditions, quality issues and the shift to more inventory dependent e-commerce business. We expect to begin reducing our warehouse footprint late in the third quarter and into fiscal 2021.

 

On a more positive note, Accentrics Home and e-commerce sales in the other divisions grew sales by 12.3% in the second quarter and 15.8% in the first half. We saw orders begin to pick up in July, with Pulaski, Samuel Lawrence Furniture and PRI reporting over 20% increases in incoming orders in the month. Pulaski and Samuel Lawrence Furniture both ended the quarter with double-digit increases in order backlog as compared to the prior year. Samuel Lawrence Hospitality net sales grew over 40% in the second quarter and 60% in the first half, respectively as compared to prior year periods, with increasing projects and bids. Samuel Lawrence Hospitality ended the quarter with backlog 44.5% higher than prior year period. Home Meridian is also in the process of launching a new division, HMidea, which will offer better-quality ready-to-assemble furniture to mass marketers and e-commerce customers. HMidea will begin showing its products at the October High Point Furniture Market.

 

Net sales in All Other decreased $1.4 million or 5.3% in the fiscal 2020 second quarter driven by decreased incoming orders in our domestic upholstery manufacturing divisions, partially offset by continued strong sales in the H Contract division. However, with targeted sales efforts, mid-year product introductions, and increased orders on several best-selling items, three out of four divisions under All Other reported double-digit order increases in July. Despite net sales declines, all divisions improved gross margin in the second quarter, benefitting from lower material costs and better cost containment in our domestic manufacturing divisions, partially offset by operating inefficiencies and higher direct labor in Bradington-Young and Shenandoah divisions due to reduced order volume in the second quarter, which was also negatively affected by the typical one-week plant shutdowns at our six domestic manufacturing facilities for the Independence Day holiday. Under a new division president, Sam Moore’s sales have started to grow again, with incoming orders up 15.6% and a 2.5% increase in backlogs in July. H Contract incoming orders increased over 40% and finished the second quarter with backlog over 50% higher than the prior year quarter end. Broader product offerings and favorable product mix with heavier weighting of imported casegoods significantly improved H Contract net sales and profitability. All Other reported a solid operating income margin of 6.8% and 8.3% for the fiscal 2020 second quarter and first half, respectively.

 

Cash and cash equivalents increased $1.9 million to $13.3 million compared to $11.4 million at fiscal 2019 year-end. Despite disappointing operating results for the first half and higher than planned inventories, we generated $11.0 million in cash from operating activities and $1.4 million from proceeds received on a note receivable from the sale of a former distribution facility. In addition, we paid $3.7 million for capital expenditures to expand our manufacturing facilities at Bradington-Young, $3.5 million in cash dividends to our shareholders, and $2.9 million towards our term loans. Our total assets and liabilities as of August 4, 2019 each increased approximately $43 million due to the adoption of Topic 842, Leases on the first day of the current fiscal year. The Home Meridian segment is working to reduce excess inventory within the next 90-120 days. With strategic inventory management and cautious capital expenditures, along with an aggregate $27.8 million available under our existing revolving credit facility to fund working capital, we are confident in our financial condition.

  

 

Results of Operations

 

The following table sets forth the percentage relationship to net sales of certain items included in the condensed consolidated statements of income included in this report.

 

 

   

Thirteen Weeks Ended

   

Twenty-Six Weeks Ended

 
   

August 4,

   

July 29,

   

August 4,

   

July 29,

 
   

2019

   

2018

   

2019

   

2018

 

Net sales

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of sales

    81.1       78.6       81.1       78.1  

Casualty loss

    -       0.3       -       0.2  

Total cost of sales

    81.1       78.9       81.1       78.3  

Gross profit

    18.9       21.1       18.9       21.7  

Selling and administrative expenses

    14.8       13.7       15.5       14.5  

Intangible asset amortization

    0.4       0.4       0.4       0.4  

Operating income

    3.8       7.1       3.0       6.8  

Other income, net

    -       -       -       -  

Interest expense, net

    0.2       0.2       0.2       0.2  

Income before income taxes

    3.6       6.9       2.7       6.6  

Income tax expense

    0.8       1.7       0.6       1.5  

Net income

    2.7       5.2       2.1       5.1  

  

Fiscal 2020 Second Quarter Compared to Fiscal 2019 Second Quarter

 

   

Net Sales

 
   

Thirteen Weeks Ended

 
   

August 4, 2019

           

July 29, 2018

           

$ Change

   

% Change

 
           

% Net Sales

           

% Net Sales

                 

Hooker Branded

  $ 39,405       25.9 %   $ 40,551       24.0 %   $ (1,146 )     -2.8 %

Home Meridian

    87,188       57.3 %     101,022       59.9 %     (13,834 )     -13.7 %

All Other

    25,655       16.8 %     27,088       16.1 %     (1,433 )     -5.3 %

Consolidated

  $ 152,248       100 %   $ 168,661       100 %   $ (16,413 )     -9.7 %

 

Unit Volume

 

FY20 Q2 %

Increase

vs. FY19 Q2

 

Average Selling Price (ASP)

 

FY20 Q2 %

Increase

vs. FY19 Q2

 
                       

Hooker Branded

    -8.8 %    

Hooker Branded

    6.8 %

Home Meridian

    -14.6 %    

Home Meridian

    0.7 %

All Other

    -8.2 %    

All Other

    2.9 %

Consolidated

    -13.6 %    

Consolidated

    4.1 %

 

 

Consolidated net sales decreased primarily due to reduced sales volume in the Home Meridian segment and to lesser extents in the Hooker Branded segment and All Other.

 

 

The net sales decrease in the Hooker Branded segment was attributable to decreased unit volume, partially offset by increased ASP, which was due to price increases necessitated by the imposition last year of a 10% tariff 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 Home Meridian segment due to sales volume loss with major furniture chains and club accounts, partially offset by increased volume in the Samuel Lawrence Hospitality business. ASP increased slightly due to favorable customer mix at Accentrics Home, which focuses on e-commerce channels.

 

 

All Other net sales decreased due to sales declines at Bradington Young and Sam Moore which experienced reduced order volume, partially offset by continued net sales growth at H Contract. Shenandoah’s net sales stayed essentially flat for the second quarter. All Other ASP increased due primarily to increased mix of higher-priced leather products at Bradington-Young.

 

   

Gross Income and Margin

 
   

Thirteen Weeks Ended

 
   

August 4, 2019

           

July 29, 2018

           

$ Change

   

% Change

 
           

% Net Sales

           

% Net Sales

                 

Hooker Branded

  $ 11,820       30.0 %   $ 12,616       31.1 %   $ (796 )     -6.3 %

Home Meridian

    10,951       12.6 %     17,398       17.2 %     (6,447 )     -37.1 %

All Other

    6,055       23.6 %     5,631       20.8 %     424       7.5 %

Consolidated

  $ 28,826       18.9 %   $ 35,645       21.1 %   $ (6,819 )     -19.1 %

 

Consolidated gross profit decreased in absolute terms and as a percentage of net sales in the fiscal 2020 second quarter.

 

 

The Hooker Branded segment’s gross profit decreased $796,000 due primarily to lower net sales and to a lesser extent increased product costs, partially offset by the absence of $500,000 casualty loss recorded in fiscal 2019 second quarter. Product costs were negatively impacted by the tariffs, higher freight costs and a write-down of distressed inventories.

 

 

The Home Meridian segment’s gross profit decreased in absolute terms and as a percentage of net sales due to lower sales volume and negative impacts of increased product costs due to excess tariff costs, higher freight costs, costs incurred in resourcing transition away from China, excess quality-related costs from earlier quality issues and increased warehousing and distribution costs to handle excess inventory related to quality issues and inventory build due to sales being less than forecast.

 

 

All Other’s gross profit increased in absolute terms and as a percentage of net sales despite a sales decline in the second quarter. All four divisions under All Other improved gross margin in the second quarter. Our domestic upholstery manufacturing divisions continued to benefit from favorable cost of goods sold due to lower leather costs, decreased benefits expense due to lower medical claims, and cost reduction initiatives, partially offset by inefficiencies of operating at reduced order volumes. Although a smaller part of our business, H Contract contributed over 60% of the increased gross profit to All Other.

 

   

Selling and Administrative Expenses (S&A)

 
   

Thirteen Weeks Ended

 
   

August 4, 2019

           

July 29, 2018

           

$ Change

   

% Change

 
            % Net Sales             % Net Sales                  

Hooker Branded

  $ 7,732       19.6 %   $ 7,673       18.9 %   $ 59       0.8 %

Home Meridian

    10,683       12.3 %     11,437       11.3 %     (754 )     -6.6 %

All Other

    4,047       15.8 %     4,074       15.0 %     (27 )     -0.7 %

Consolidated

  $ 22,462       14.8 %   $ 23,184       13.7 %   $ (722 )     -3.1 %

 

 

Consolidated selling and administrative (“S&A”) expenses decreased in absolute terms but increased as a percentage of net sales in the fiscal 2020 second quarter.

 

 

Hooker Branded segment S&A expenses stayed essentially flat in absolute terms and increased slightly as a percentage of net sales in the fiscal 2020 second quarter due to lower net sales. Increased advertising expense, bad debt expense, professional service expenses and employee training expenses were partially offset by decreased bonus and other compensation costs and lower selling expenses.

 

 

Home Meridian segment S&A expenses decreased in absolute terms due to decreased selling expenses and compensation costs due to lower sales and profitability, partially offset by start-up costs for HMIdea. Home Meridian segment S&A expenses increased as a percentage of net sales due to lower net sales.

 

 

All Other S&A expenses stayed essentially flat in absolute terms and increased as a percentage of net sales due to lower net sales.

 

   

Intangible Asset Amortization

 
   

Thirteen Weeks Ended

 
   

August 4, 2019

           

July 29, 2018

           

$ Change

   

% Change

 
           

% Net Sales

           

% Net Sales

                 

Intangible asset amortization

  $ 596       0.4 %   $ 596       0.4 %   $ -