HOOKER FURNISHINGS Corp [HOFT] Filings

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

(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 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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

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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

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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;

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●

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:

2.50:1.0 through July 30, 2023;

2.25:1.0 through July 30, 2024; and

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.

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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

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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.

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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

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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