10-Q 1 hookerfurniture10q073116.htm 10-Q
 

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 July 31, 2016

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated Filer ☐
Accelerated filer ☒
Non-accelerated Filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 2, 2016:

Common stock, no par value
11,562,810
(Class of common stock)
(Number of shares)
 

 
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
3
 
 
 
Item 2.
20
 
 
 
Item 3.
35
 
 
 
Item 4.
36
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 6.
37
 
 
 
38

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

As of
 
July 31,
   
January 31,
 
   
2016
   
2016
 
   
(unaudited)
       
Assets
           
Current assets
           
    Cash and cash equivalents
 
$
39,111
   
$
53,922
 
    Trade accounts receivable, less allowance for doubtful
       accounts of $3,848 and $1,032 on each respective date
   
67,435
     
28,176
 
    Inventories
   
76,862
     
43,713
 
    Prepaid expenses and other current assets
   
4,354
     
2,256
 
         Total current assets
   
187,762
     
128,067
 
Property, plant and equipment, net
   
27,521
     
22,768
 
Cash surrender value of life insurance policies (see note 8)
   
21,907
     
21,888
 
Deferred taxes
   
7,240
     
5,350
 
Intangible assets (see note 9)
   
26,715
     
1,382
 
Goodwill (see notes 3 and 9)
   
23,398
     
-
 
Other assets
   
2,178
     
2,198
 
         Total non-current assets
   
108,959
     
53,586
 
               Total assets
 
$
296,721
   
$
181,653
 
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
    Current portion of term loan
 
$
5,817
   
$
-
 
    Trade accounts payable
   
29,426
     
9,105
 
    Accrued salaries, wages and benefits
   
5,668
     
4,834
 
    Income tax accrual
   
2,389
     
357
 
    Customer deposits
   
5,721
     
797
 
    Other accrued expenses
   
3,373
     
1,512
 
         Total current liabilities
   
52,394
     
16,605
 
Long term debt (see note 10)
   
44,680
     
-
 
Deferred compensation (see note 11)
   
10,677
     
8,409
 
Pension plan (see note 11)
   
4,881
     
-
 
Income tax accrual
   
169
     
166
 
Other long-term liabilities
   
1,460
     
412
 
Total long-term liabilities
   
61,867
     
8,987
 
              Total liabilities
   
114,261
     
25,592
 
                 
Shareholders’ equity
               
    Common stock, no par value, 20,000 shares authorized,
      11,563 and 10,818 shares issued and outstanding on each date (see note 4)
   
39,551
     
18,667
 
    Retained earnings
   
142,793
     
137,255
 
    Accumulated other comprehensive income
   
116
     
139
 
              Total shareholders’ equity
   
182,460
     
156,061
 
                   Total liabilities and shareholders’ equity
 
$
296,721
   
$
181,653
 

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)

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 31,
   
August 2,
   
July 31,
   
August 2,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Net sales
 
$
136,163
   
$
60,140
   
$
257,994
   
$
121,096
 
                                 
   Cost of sales
   
107,685
     
44,047
     
202,917
     
88,628
 
                                 
      Gross profit
   
28,478
     
16,093
     
55,077
     
32,468
 
                                 
Selling and administrative expenses
   
19,441
     
10,234
     
40,385
     
21,367
 
Intangible asset amortization
   
813
     
-
     
2,467
     
-
 
                                 
        Operating income
   
8,224
     
5,859
     
12,225
     
11,101
 
                                 
Other income, net
   
259
     
69
     
418
     
213
 
Interest expense, net
   
247
     
18
     
511
     
30
 
                                 
      Income before income taxes
   
8,236
     
5,910
     
12,132
     
11,284
 
                                 
Income tax expense
   
2,887
     
1,972
     
4,284
     
3,874
 
                                 
       Net income
 
$
5,349
   
$
3,938
   
$
7,848
   
$
7,410
 
                                 
Earnings per share
                               
       Basic
 
$
0.46
   
$
0.36
   
$
0.68
   
$
0.69
 
       Diluted
 
$
0.46
   
$
0.36
   
$
0.68
   
$
0.69
 
                                 
Weighted average shares outstanding:
                               
       Basic
   
11,533
     
10,783
     
11,524
     
10,770
 
       Diluted
   
11,554
     
10,806
     
11,548
     
10,796
 
                                 
Cash dividends declared per share
 
$
0.10
   
$
0.10
   
$
0.20
   
$
0.20
 

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)

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 31,
   
August 2,
   
July 31,
   
August 2,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Net Income
 
$
5,349
   
$
3,938
   
$
7,848
   
$
7,410
 
       Other comprehensive income:
                               
                 Amortization of actuarial (gain) loss
   
(18
)
   
44
     
(35
)
   
90
 
                 Income tax effect on amortization
   
6
     
(16
)
   
12
     
(34
)
        Adjustments to net periodic benefit cost
   
(12
)
   
28
     
(23
)
   
56
 
                                 
Total comprehensive Income
 
$
5,337
   
$
3,966
   
$
7,825
   
$
7,466
 


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)

   
Twenty-Six Weeks Ended
 
   
July 31,
   
August 2,
 
   
2016
   
2015
 
Operating Activities:
           
Net income
 
$
7,848
   
$
7,410
 
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
   
4,748
     
1,339
 
(Gain)/Loss on disposal of assets
   
(36
)
   
41
 
Deferred income tax expense
   
(1,875
)
   
754
 
Noncash restricted stock and performance awards
   
832
     
315
 
Provision for doubtful accounts
   
(506
)
   
(280
)
Changes in assets and liabilities:
               
Trade accounts receivable
   
10,078
     
3,981
 
Inventories
   
4,458
     
(2,046
)
Income tax recoverable
   
-
     
(233
)
Gain on life insurance policies
   
(541
)
   
(559
)
Prepaid expenses and other current assets
   
109
     
414
 
Trade accounts payable
   
(2,474
)
   
(296
)
Accrued salaries, wages, and benefits
   
(1,451
)
   
(758
)
Accrued income taxes
   
2,032
     
(1,368
)
Accrued commissions
   
(435
)
   
(66
)
Customer deposits
   
2,304
     
(49
)
Other accrued  expenses
   
(945
)
   
102
 
Deferred compensation
   
(51
)
   
292
 
Other long-term liabilities
   
6
     
27
 
              Net cash provided by operating activities
   
24,101
     
9,020
 
                 
Investing Activities:
               
Acquisition of Home Meridian
   
(86,062
)
   
-
 
Purchases of property and equipment
   
(1,160
)
   
(1,313
)
Proceeds received on notes for sale of assets
   
96
     
10
 
Proceeds from life insurance premiums
   
644
     
-
 
Premiums paid on life insurance policies
   
(594
)
   
(589
)
              Net cash used in investing activities
   
(87,076
)
   
(1,892
)
                 
Financing Activities:
               
Proceeds from long-term debt
   
60,000
     
-
 
Payments for long-term debt
   
(9,361
)
   
-
 
Debt issuance cost
   
(165
)
   
-
 
Cash dividends paid
   
(2,310
)
   
(2,160
)
              Net cash provided by (used in) financing activities
   
48,164
     
(2,160
)
                 
Net (decrease) increase in cash and cash equivalents
   
(14,811
)
   
4,968
 
Cash and cash equivalents - beginning of year
   
53,922
     
38,663
 
Cash and cash equivalents - end of quarter
 
$
39,111
   
$
43,631
 
Supplemental schedule of cash flow information:
               
Interest paid, net
 
$
391
   
$
29
 
Income taxes paid, net
   
4,120
   
$
4,688
 
Non-cash transactions:
               
Acquisition cost paid in common stock
 
$
20,267
     
-
 
Increase in property and equipment through accrued purchases
   
54
     
51
 
 
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 July 31, 2016

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 January 31, 2016 (“2016 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.

References in this document to “HMI” refer to Home Meridian International, the counter-party to the asset purchase agreement we entered into on January 6, 2016. References in this document to “Home Meridian” or “Home Meridian segment” refer to the newly acquired business operations and operating segment that was created upon the closing of the asset purchase agreement on February 1, 2016.

On February 1, 2016, we acquired substantially all of the assets and assumed certain liabilities of Home Meridian International, Inc. (“HMI”) for $86 million in cash and the issuance of 716,910 shares of our common stock valued at $20.3 million (such numbers include agreed upon post-closing working capital adjustments). Based on the way we manage, evaluate and internally report our operations, we determined that Home Meridian’s newly acquired operations will be reported as a separate operating segment. See notes 3 and 14 for additional details on the acquisition and our operating segments. The results of operations of Home Meridian are included in our results of operations beginning on February 1, 2016, the first day of our 2017 fiscal year. Conversely, since the acquisition was completed on the first day of the current fiscal year, comparable prior-year information for the Home Meridian segment is not included in the financial statements presented in this report. The acquisition is discussed in greater detail below in Note 3 Acquisition.

We adopted Accounting Standard’s Update (“ASU”) No. 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs" in the first quarter of fiscal 2017. Prior to the issuance of this standard, debt issuance costs were required to be recorded as assets on the balance sheet. This update requires that debt issuance costs related to a debt liability be presented on the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. This update does not change the recognition and measurement of debt issuance costs. Prior to the recent Home Meridian acquisition, we had no outstanding debt. Consequently, there are no costs to reclassify as a result of the adoption of this standard. However, we capitalized debt issuance costs related to the recent acquisition of the Home Meridian business during the fiscal 2017 first quarter and those unamortized costs are netted against our outstanding debt on our condensed consolidated balance sheets.

We adopted ASU No. 2015-16, "Business Combinations (Topic 805) Simplifying the Accounting for Measurement Period Adjustments", in the first quarter of fiscal 2017. This update requires that an acquirer in a business combination recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of any changes in the provisional amounts must be calculated as if they occurred as of the acquisition date. The update also requires the acquirer to disclose the portion of the effect on earnings that would have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date. This update must be adopted prospectively and may be early adopted for financial statements that had not been issued before the update's issuance date. The adoption of the update did not have a material effect on our Condensed Consolidated Income Statements in the fiscal 2017 first half but may in future quarters as management’s estimates and appraisals related to the Home Meridian acquisition are finalized.


2.          Fiscal Periods

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 2, 2016, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 1, 2016, which both ended July 31, 2016,  compared to the  thirteen-week period that began May 4, 2015 and the twenty-six week period that began February 2, 2015, which both ended August 2, 2015.

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

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and will end January 29, 2017; and

§
the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and ended January 31, 2016.

3.          Acquisition

On February 1, 2016, we completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of Home Meridian International, Inc. (“HMI”) pursuant to the Asset Purchase Agreement into which we and HMI entered on January 5, 2016 (the “Asset Purchase Agreement”). Upon completion and including post-closing working capital adjustments, we paid $86 million in cash and issued 716,910 shares of our common stock (the “Stock Consideration”) to designees of HMI as consideration for the Acquisition. The Stock Consideration consisted of (i) 530,598 shares due to the $15 million of consideration payable in shares of our common stock under the Asset Purchase Agreement, and (ii) 186,312 shares issued pursuant to working capital adjustments detailed in the Asset Purchase Agreement. The working capital adjustment was driven by an increase in HMI’s accounts receivable due to strong sales towards the end of calendar 2015. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of our common stock for the fifteen trading days immediately preceding the closing date ($28.27). Under the Asset Purchase Agreement, we also assumed certain liabilities of HMI, including approximately $7.8 million of liabilities related to certain retirement plans. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of HMI.

Also on February 1, 2016, we entered into an amended and restated loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the Acquisition. The Loan Agreement increases the amount available under our existing unsecured revolving credit facility to $30 million and increases the sublimit of such facility available for the issuance of letters of credit to $4 million. The Loan Agreement also provided us with a $41 million unsecured term loan (the “Unsecured Term Loan”) and a $19 million term loan (the “Secured Term Loan”) secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the “Security Agreement”). On February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan and the Secured Term Loan in connection with the completion of the Acquisition. For additional details regarding the Loan Agreement, see Note 9 Long Term Debt, below.

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

The following table summarizes the preliminary estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of July 31, 2016. The preliminary estimates of fair value of identifiable assets acquired and liabilities assumed are subject to revisions, which may result in adjustments to the preliminary values presented below, when management’s appraisals and estimates are finalized, expected to be completed by the end of the current fiscal year.
 
Fair value estimates of assets acquired and liabilities assumed
     
Purchase price consideration
     
     Cash paid for assets acquired, including working capital adjustment
 
$
86,062
 
     Value of shares issued for assets acquired
   
15,000
 
     Value of shares issued for excess net working capital
   
5,267
 
Total purchase price
 
$
106,329
 
         
   Accounts receivable
 
$
46,210
 
   Inventory
   
37,606
 
   Prepaid expenses and other current assets
   
1,776
 
   Property and equipment
   
5,801
 
   Intangible assets
   
27,800
 
   Goodwill
   
23,398
 
   Accounts payable
   
(22,681
)
   Accrued expenses
   
(4,861
)
   Pension plan liabilities and deferred compensation balances
   
(8,720
)
         
Total purchase price
 
$
106,329
 
 
Property and equipment were recorded at fair value and primarily consist of leasehold improvements and will be amortized over their estimated useful lives.
 
Goodwill is calculated as the excess of the purchase price over the net assets acquired. The goodwill recognized is attributable to growth opportunities and expected synergies. All but $1.5 million in goodwill will be deductible for income tax purposes.
 
Intangible assets, net, consist of three separately identified assets:

§
Home Meridian tradenames of $11.6 million consisting of:
o
Indefinite-lived intangible assets with an aggregate fair value of $11.4 million. The tradenames are not subject to amortization, but will be evaluated annually and as circumstances dictate, for impairment; and
o
Definite-lived intangible assets with an aggregate fair value of $200,000, which we expect to amortize over an eight-year period.
§
Home Meridian customer relationships which are definite-lived intangible assets with an aggregate fair value of $14.4 million. The customer relationships are amortizable and will be amortized over a period of eleven years; and
§
Home Meridian order backlog which is a definite-lived intangible assets with an aggregate fair value of $1.8 million which we will amortize over five months, with most of the expense recognized in the fiscal 2017 first quarter.

The allocation of the purchase price to intangible assets, as well as their estimated useful lives, is preliminary and may be adjusted.

We also assumed the net liability for Home Meridian’s legacy pension plans of $8.7 million, which was based on an actuarial valuation performed on February 2, 2016. The market value of pension plan assets, primarily consisting of mutual funds, was $11.6 million on February 2, 2016. Components of net periodic benefit cost for these plans are based on annual actuarial valuations and are included in our condensed consolidated statements of income under selling and administrative expenses.


The following unaudited consolidated pro forma summary has been prepared by adjusting our historical data to give effect to the Acquisition as if it had occurred on February 1, 2015:

   
13 Weeks Ended
   
26 Weeks Ended
 
(in millions except per share data)
 
August 2, 2015
   
August 2, 2015
 
   
(Pro forma)
   
(Pro forma)
 
Net Sales
 
$
139,580
   
$
265,379
 
Net Income
   
5,280
     
9,170
 
Basic EPS
   
0.49
     
0.85
 
Diluted EPS
   
0.49
     
0.85
 

The unaudited consolidated pro forma financial information was prepared in accordance with existing standards and is not necessarily indicative of the results of operations that would have occurred if the Acquisition had been completed on the date indicated, nor is it indicative of our future operating results.

Material non-recurring adjustments excluded from the pro forma financial information in the table above consist of amortization of intangible assets, elimination of transaction related costs and an adjustment of the interest rate on short and long term debt to reflect the interest rates in the our amended credit facility.

The unaudited pro forma results do not reflect events that either have occurred or may occur in the future. They also do not give effect to certain charges that we expect to incur in connection with the Acquisition, including, but not limited to, additional professional fees, employee integration, retention, potential asset impairments and accelerated depreciation and amortization.

We recorded Acquisition related costs of $100,000 in the fiscal second quarter and $1.0 million in the first quarter of fiscal 2017 and expect to incur an additional $200,000 during the remainder of fiscal 2017. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income.

4.          Shareholders’ Equity

The number of shares and the amount of common stock outstanding changed materially from the end of the 2016 fiscal year, as a result of issuing 716,910 shares of common stock to the designees of HMI as partial consideration for the Acquisition. The table below reconciles the number of shares and amounts of common stock outstanding from our most recent fiscal year end to the end of the fiscal 2017 second quarter. The table shows the effects of the Acquisition issuance, as well as other activity in the common stock account unrelated to the Acquisition.

   
Common Stock
 
   
Shares
   
Amount
 
             
Outstanding shares January 31, 2016
   
10,818
   
$
18,667
 
Shares issued for Acquisition
   
717
     
20,267
 
Restricted share grants
   
28
     
423
 
Restricted stock compensation costs
   
-
     
194
 
Outstanding shares July 31, 2016
   
11,563
   
$
39,551
 



5.          Accounts Receivable

   
July 31,
   
January 31,
 
   
2016
   
2016
 
             
Trade accounts receivable
 
$
69,585
   
$
25,520
 
Receivable from factor
   
1,698
     
3,688
 
Allowance for doubtful accounts
   
(3,848
)
   
(1,032
)
   Accounts receivable
 
$
67,435
   
$
28,176
 

“Receivable from factor” represents amounts due with respect to factored accounts receivable. Before the fiscal 2016 second quarter, we factored substantially all of our domestically-produced upholstery accounts receivable without recourse to us. However, we ended our factoring relationships at Sam Moore in the fiscal 2016 second quarter and at Bradington Young in the fiscal 2017 second quarter. We are now managing Sam Moore and Bradington Young’s accounts receivable in-house.  As of July 31, 2016, $1.7 million in Bradington Young receivables represent outstanding receivables for which payment is due to us from the factor as part of its residual obligations under Bradington Young’s legacy factoring agreement.

A limited number of our accounts receivable for Bradington Young were factored with recourse to us. The amounts of these receivables at July 31, 2016 and January 31, 2016 were $168,000 and $255,000, respectively. If the factor is unable to collect the amounts due, invoices are returned to us for collection. We include an estimate of potentially uncollectible receivables in our calculation of our allowance for doubtful accounts.

6.          Inventories
          
   
July 31,
   
January 31,
 
   
2016
   
2016
 
Finished furniture
 
$
88,066
   
$
55,120
 
Furniture in process
   
591
     
727
 
Materials and supplies
   
8,702
     
7,994
 
   Inventories at FIFO
   
97,359
     
63,841
 
Reduction to LIFO basis
   
(20,497
)
   
(20,128
)
   Inventories
 
$
76,862
   
$
43,713
 

7.          Property, Plant and Equipment

   
Depreciable Lives
   
July 31,
   
Jan 31,
 
   
(In years)
   
2016
   
2016
 
                   
Buildings and land improvements
 
15 - 30
   
$
23,010
   
$
22,777
 
Computer software and hardware
 
3 - 10
     
17,779
     
16,137
 
Machinery and equipment
 
10
     
4,911
     
4,864
 
Leasehold improvements
 
5
     
6,480
     
2,817
 
Furniture and fixtures
 
3 - 8
     
1,799
     
1,453
 
Other
 
5
     
1,074
     
546
 
Total depreciable property at cost
     
55,053
     
48,594
 
Less accumulated depreciation
         
29,912
     
27,739
 
Total depreciable property, net
     
25,141
     
20,855
 
Land
         
1,067
     
1,067
 
Construction-in-progress
         
1,313
     
846
 
Property, plant and equipment, net
   
$
27,521
   
$
22,768
 



8.          Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer 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 July 31, 2016 and January 31, 2016, 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. The majority of our Company-owned life insurance policies are pledged as collateral for the secured term loan (which had a balance of $17.1 million balance at July 31, 2016) that is part of our original $90 million credit facility related to the Home Meridian acquisition (described in Note 10. Debt below).

As of July 31, 2016, a mortgage note receivable (related to the previously announced sale of our Cloverleaf facility during the fiscal 2015 first quarter) was measured at fair value on a non-recurring basis using Level 3 inputs. The note receivable was recorded at approximately $1.6 million, which was the face value of the note issued for the mortgage. The carrying value of the note receivable is assumed to approximate its fair value. We measure the probability to collect amounts due to us under this note receivable primarily based on the buyer’s payment history. Specifically, we consider the buyer’s adherence to the contractual payment terms for both the timeliness and payment amounts. Should it become probable that we would be unable to collect all amounts due according to the contractual terms of the underlying loan agreement, we would measure the note for impairment and record a valuation allowance against the note receivable, if needed, with the related expense charged to income for that period. The current portion of this note receivable is included on the “Prepaid expenses and other current assets” line of our condensed consolidated balance sheets. The non-current portion of this note receivable is included in the “Other assets” line of our condensed consolidated balance sheets.

The assets of the Home Meridian segment’s legacy Pension Plan (the “Plan”) were measured at fair value on a recurring basis based on Level 1 inputs. Pension plan assets, held in a trust account by the Plan’s trustee, primarily consist of a wide-range of mutual fund asset classes, including domestic and international equities, fixed income securities such as corporate bonds, mortgage-backed securities, real estate investments and U.S. Treasuries. As of February 2, 2016, the date of the latest actuarial valuation, Plan assets were netted against the Plan’s Projected Benefit Obligation (“PBO”) on that date to determine the Plan’s funded status. Since the PBO exceeded the market value of the Plan’s assets, the funded status is recorded in our condensed consolidated balance sheets as a net liability. As of February 2, 2016, the net liability for this plan was $6.2 million, with $1.2 million of that amount (representing expected benefit payments over fiscal 2017) included in the “Accrued salaries, wages and benefits” line of our condensed consolidated balance sheets and $4.9 million shown on the “Pension Plan” line of our condensed consolidated balance sheets.  The market value of pension plan assets shown below are as of February 2, 2016.  See note 11. Employee Benefit Plans for additional information about the Plan.



Our assets measured at fair value on a recurring basis at July 31, 2016 and January 31, 2016, respectively, were as follows:

   
Fair value at July 31, 2016*
   
Fair value at January 31, 2016
 
Description
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
    (In thousands)  
Assets measured at fair value
                                               
Company-owned life insurance
 
$
-
   
$
21,907
   
$
-
   
$
21,907
   
$
-
   
$
21,888
   
$
-
   
$
21,888
 
Mortgage note receivable
   
-
     
-
     
1,561
     
1,561
     
-
     
-
     
1,575
     
1,575
 
Pension plan assets
   
11,585
                     
11,585
                                 
 
*February 2, 2016 for Pension plan assets                              

9.          Intangible Assets

During the fiscal 2017 first quarter, we recorded both non-amortizable and amortizable intangible assets as a result of our acquisition of Home Meridian on February 1, 2016. The acquisition-related trade names, customer relationships and order backlog have been assigned preliminary fair values subject to additional analysis during the measurement period as we continue to gather information. Details of these new intangible assets, as well as previously recorded intangible assets assigned to our Upholstery and All other operating segments, are as follows:

     
July 31,
   
January 31,
 
 
Segment
 
2016
   
2016
 
Non-amortizable Intangible Assets
             
Goodwill
Home Meridian
 
$
23,398
   
$
-
 
Trademarks and trade names - Home Meridian
Home Meridian
   
11,400
     
-
 
Trademarks and trade names - Bradington-Young
Upholstery
   
861
     
861
 
Trademarks and trade names - Sam Moore
Upholstery
   
396
     
396
 
URL- Homeware.com
All other
   
125
     
125
 
   Total non-amortizable assets
     
36,180
     
1,382
 

All of our amortizable intangible assets are recorded in our Home Meridian segment. The carrying amounts and changes therein of those amortizable intangible assets were as follows:

   
Amortizable Intangible Assets
 
   
Customer
                   
   
Relationships
   
Backlog
   
Trademarks
   
Totals
 
                         
Balance at January 31, 2016
 
$
-
   
$
-
   
$
-
   
$
-
 
Intangibles- HMI acquisition
   
14,400
     
1,800
     
200
     
16,400
 
Amortization
   
(661
)
   
(1,800
)
   
(6
)
   
(2,467
)
Balance at July 31, 2016
 
$
13,739
   
$
-
   
$
194
   
$
13,933
 


The estimated amortization expense associated with our amortizable intangible assets is expected to be as follows:

Fiscal Year
 
Amount
 
       
Remainder of 2017
 
$
667
 
2018
   
1,334
 
2019
   
1,334
 
2020
   
1,334
 
2021
   
1,334
 
Thereafter
   
7,930
 
   
$
13,933
 

The expected amortization expense will be approximately $335,000 in each of the fiscal 2017 third and fourth quarters.
 
10.        Debt

On February 1, 2016, we entered into an amended and restated loan agreement (the "Loan Agreement") with Bank of America, N.A. ("BofA") in connection with the completion of the Home Meridian acquisition. Also on February 1, 2016, we borrowed in full the amounts available under the Unsecured Term Loan (the "Unsecured Term Loan") and the Secured Term Loan (the "Secured Term Loan") in connection with the completion of this acquisition.

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

·
Unsecured revolving line of credit. The Loan Agreement increased the amount available under our existing unsecured revolving credit facility to $30 million and increased the sublimit of the facility available for the issuance of letters of credit to $4 million. Amounts outstanding under the revolving facility bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must also pay a quarterly unused commitment fee that is based on the average daily amount of the facility utilized during the applicable quarter;

·
Unsecured Term Loan. The Loan Agreement provided us with a $41 million unsecured term loan. Any amount borrowed under the Unsecured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 1.50%. We must repay any principal amount borrowed under Unsecured Term Loan in monthly installments of approximately $490,000, together with any accrued interest, until the full amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Unsecured Term Loan will become due and payable; and

·
Secured Term Loan. The Loan Agreement provided us with a $19 million term loan secured by a security interest in certain Company-owned life insurance policies granted to BofA under a security agreement, dated as of February 1, 2016 (the "Security Agreement"). Any amount borrowed under the Secured Term Loan will bear interest at a rate, adjusted monthly, equal to the then current LIBOR monthly rate plus 0.50%.We must pay the interest accrued on any principal amount borrowed under the Secured Term Loan on a monthly basis until the full principal amount borrowed is repaid or until February 1, 2021, at which time all amounts outstanding under the Secured Term Loan will become due and payable. BofA's rights under the Security Agreement are enforceable upon the occurrence of an event of default under the Loan Agreement.

We may prepay any outstanding principal amounts borrowed under either the Unsecured Term Loan or the Secured Term Loan in full or in part on any interest payment date without penalty. Since the closing date we have made unscheduled payments of $5.0 million on the Unsecured Term Loan and $1.9 million on the Secured Term Loan, in addition to the regularly scheduled debt service payments required by the Loan Agreement.

Additionally, we incurred $165,000 in debt issuance costs in connection with our terms loans. These costs are amortized over the life of the loan using the interest method and are included in the "interest expense" line of our condensed consolidated income statements. Unamortized debt issuance costs are netted against the carrying value of our term loans on our condensed consolidated balance sheets. As of July 31, 2016, unamortized loan costs of $142,000 were netted against the carrying value of our term loans on our condensed consolidated balance sheets.

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

§
Maintain a tangible net worth of at least:
As of the fiscal year-end January 31, 2016, $105.0 million plus 40% of net income before taxes earned in the 2016 fiscal year; and
As of the end of each subsequent fiscal year, the minimum tangible net worth required for the prior fiscal year, plus 40% of net income, before taxes, earned in each subsequent fiscal year.
§
Maintain a ratio of funded debt to EBITDA not exceeding:
2.50:1.0 through August 31, 2017;
2.25:1.0 through August 31, 2018; and
2.00:1.00 thereafter.
§
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 with expenditures to acquire fixed assets pursuant to the Acquisition being excluded for the fiscal year in which the Acquisition occurs.

The 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 Loan Agreement does not restrict our ability to pay cash dividends on, or repurchase, shares of our common stock, subject to our compliance with the financial covenants discussed above, if we are not otherwise in default under the Loan Agreement.

As of July 31, 2016, we had an aggregate $28.9 million available under our revolving credit facility to fund working capital needs. Standby letters of credit in the aggregate amount of $1.1 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the revolving credit facility as of July 31, 2016.  There were no additional borrowings outstanding under the revolving credit facility on July 31, 2016.  Any principal outstanding under the revolving credit facility is due July 31, 2018.

11.        Employee Benefit Plans

We maintain a supplemental retirement income plan (“SRIP”) for certain former and current executives of Hooker Furniture Corporation. Additionally, we assumed Home Meridian’s pension plan and other retirement plan liabilities upon completion of the Home Meridian acquisition on February 1, 2016. Home Meridian’s legacy pension plan obligations relate to Pulaski Furniture Corporation, one of two entities combined to form HMI. 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 Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.

The SRIP, SERP and Pension plans are all “frozen” and we do not expect to add additional employees to any of these plans in the future. Pension plan assets include a range of mutual fund asset classes and are measured at fair value using level one inputs, which are quoted prices in active markets.

The consolidated liability for our pension plan obligations at July 31, 2016 and January 31, 2016 were $16.8 million and $8.2 million, respectively, and are shown in our condensed consolidated balance sheets as follows:

   
July 31,
   
January 31,
 
   
2016
   
2016
 
Accrued salaries, wages and benefits (current portions)
       
   SRIP
 
$
354
   
$
354
 
   SERP
   
261
     
-
 
   Pension
   
1,191
     
-
 
      Total current portion
 
$
1,806
   
$
354
 
                 
Long-term portions
               
   SRIP
 
$
8,009
   
$
7,799
 
   SERP
   
2,123
     
-
 
      Total deferred compensation*
   
10,132
     
7,799
 
   Pension Plan
   
4,881
     
-
 
      Total deferred compensation and pension plans
   
15,013
   
$
7,799
 
                 
   Consolidated pension liabilities
 
$
16,819
   
$
8,153
 

*Total Deferred Compensation shown in the Long-Term Liabilities section of our Condensed Consolidated Balance Sheets is $10.7 million at July 31, 2016 and $8.4 million at January 31, 2016. These totals include the SRIP and SERP amounts shown in the table above, as well as miscellaneous additional long-term compensation-related items unrelated to these plans.


Components of net periodic benefit cost for the SRIP, SERP and pension plans are included in our condensed consolidated statements of income under selling and administrative expenses.

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 31,
   
August 2,
   
July 31,
   
August 2,
 
   
2016
   
2015
   
2016
   
2015
 
Net periodic benefit costs
                       
   SRIP:
                       
      Service cost
 
$
94
   
$
101
   
$
187
   
$
202
 
      Interest cost
   
85
     
72
     
170
     
144
 
      Actuarial loss (gain)
   
(18
)
   
45
     
(35
)
   
90
 
         Total SRIP
   
161
     
218
     
322
     
436
 
                                 
   SERP:
                               
      Interest cost
   
22
     
-
     
44
     
-
 
         Total SERP
   
22
     
-
     
44
     
-
 
                                 
   Pension Plan:
                               
      Interest cost
   
187
     
-
     
376
     
-
 
      Expected return on pension plan assets
   
(197
)
   
-
     
(395
)
   
-
 
      Expected administrative expenses
   
70
     
-
     
140
     
-
 
         Total Pension Plan
   
60
     
-
     
121
     
-
 
                                 
Consolidated net periodic benefit costs
 
$
243
   
$
218
     
487
   
$
436
 

The expected long-term rate of return on Pension Plan assets is 7.0% as of the Plan’s most recent valuation date of February 2, 2016.

We contributed $292,000 in required contributions to the Pension Plan in the fiscal 2017 first half and expect to contribute an additional $292,000 in required contributions to the Pension Plan during the second half fiscal 2017. The SRIP and SERP plans are unfunded plans. Consequently, we expect to pay a total of approximately $300,000 in benefit payments from our general assets during the remainder of fiscal 2017 to fund SRIP and SERP payments.

12.        Earnings Per Share

We refer you to the discussion of Earnings Per Share in Note 1-Summary of Significant Accounting Policies, in the financial statements included in our 2016 Annual Report, for additional information concerning the calculation of earnings per share.

We have issued restricted stock awards to non-employee members of the board of directors since 2006 and 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 expect to continue to grant these types of awards annually in the future. The following table sets forth the number of outstanding restricted stock awards and RSUs, net of forfeitures and vested shares, as of the fiscal period-end dates indicated:

   
July 31,
   
January 31,
 
   
2016
   
2016
 
             
Restricted shares
   
26
     
25
 
Restricted stock units
   
20
     
13
 
     
46
     
38
 



All restricted shares and RSUs 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
 
   
July 31,
   
August 2,
   
July 31,
   
August 2,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Net income
 
$
5,349
   
$
3,938
   
$
7,848
   
$
7,410
 
   Less: Unvested participating restricted stock dividends
   
3
     
3
     
5
     
3
 
            Net earnings allocated to unvested participating restricted stock
   
12
     
10
     
18
     
10
 
Earnings available for common shareholders
   
5,334
     
3,925
     
7,825
     
7,397
 
                                 
Weighted average shares outstanding for basic earnings per share
   
11,533
     
10,783
     
11,524
     
10,770
 
Dilutive effect of unvested restricted stock and RSU awards
   
21
     
23
     
24
     
26
 
   Weighted average shares outstanding for diluted earnings per share
   
11,554
     
10,806
     
11,548
     
10,796
 
                                 
Basic earnings per share
 
$
0.46
   
$
0.36
   
$
0.68
   
$
0.69
 
                                 
Diluted earnings per share
 
$
0.46
   
$
0.36
   
$
0.68
   
$
0.69
 

The increase in the number of shares is primarily due to the issuance of 716,910 shares of our common stock as a result of the Home Meridian acquisition on February 1, 2016.

13.        Income Taxes

The effective tax rates for the fiscal 2017 and 2016 second quarters were 35.1% and 33.4%, respectively.  The effective tax rates for the first half of fiscal 2017 and 2016 were 35.3% and 34.3%, respectively. The effective tax rates in both the fiscal 2017 second quarter and fiscal 2017 first half were higher than the comparable 2016 fiscal periods primarily due to the settlement of an uncertain tax position during the fiscal 2016 second quarter.
 
The net unrecognized tax benefits as of July 31, 2016 and January 31, 2016, which, if recognized, would affect our effective tax rate are $169,000 and $221,000, respectively.
 
Tax returns for fiscal years 2013 through 2016 remain subject to examination by federal and state taxing authorities. An examination of the fiscal 2013 return with federal taxing authorities was completed during fiscal 2016 with no changes. An examination of our North Carolina state tax returns for fiscal year 2012 and 2013 was completed during the fiscal 2017 first quarter with no material changes.



14.        Segment Information

For financial reporting purposes, we are organized into four operating segments – Hooker Casegoods, Home Meridian, Upholstery and an All Other segment, which includes H Contract and Homeware. Based on the way in which we manage, evaluate and internally report our operations, we determined that Home Meridian’s newly acquired operations will be reported as a separate operating segment. The following table presents segment information for the periods, and as of the dates, indicated:

   
Thirteen Weeks Ended
   
Twenty-Six Weeks Ended
 
   
July 31, 2016
         
August 2, 2015
         
July 31, 2016
         
August 2, 2015
       
         
% Net
         
% Net
         
% Net
         
% Net
 
Net Sales
       
Sales
         
Sales
         
Sales
         
Sales
 
   Hooker Casegoods
 
$
33,582
     
24.7
%
 
$
37,314
     
62.0
%
 
$
66,510
     
25.8
%
 
$
75,797
     
62.6
%
   Upholstery
   
19,847
     
14.6
%
   
20,696
     
34.4
%
   
41,740
     
16.2
%
   
41,999
     
34.7
%
   Home Meridian
   
80,362
     
59.0
%
   
-
     
0.0
%
   
145,338
     
56.3
%
   
-
     
0.0
%
   All other
   
2,372
     
1.7
%
   
2,193
     
3.6
%
   
4,406
     
1.7
%
   
3,525
     
2.9
%
   Intercompany eliminations
   
-
     
0.0
%
   
(63
)
           
-
     
0.0
%
   
(225
)
       
Consolidated
 
$
136,163
     
100.0
%
 
$
60,140
     
100.0
%
 
$
257,994
     
100.0
%
 
$
121,096
     
100.0
%
                                                                 
Gross Profit
                                                               
   Hooker Casegoods
 
$
10,662
     
31.7
%
 
$
10,904
     
29.2
%
 
$
20,816
     
31.3
%
 
$
22,205
     
29.3
%
   Upholstery
   
4,642
     
23.4
%
   
4,532
     
21.9
%
   
9,718
     
23.3
%
   
9,251
     
22.0
%
   Home Meridian
   
12,413
     
15.4
%
   
-
     
0.0
%
   
23,123
     
15.9
%
   
-
     
0.0
%
   All other
   
757
     
31.9
%
   
649
     
29.6
%
   
1,413
     
32.1
%
   
999
     
28.3
%
   Intercompany eliminations
   
4
             
8
             
7
             
13
         
Consolidated
 
$
28,478
     
20.9
%
 
$
16,093
     
26.8
%
 
$
55,077
     
21.3
%
 
$
32,468
     
26.8
%
                                                                 
Operating Income
                                                               
   Hooker Casegoods
 
$
4,341
     
12.9
%
 
$
4,456
     
11.9
%
 
$
6,422
     
9.7
%
 
$
8,557
     
11.3
%
   Upholstery
   
1,316
     
6.6
%
   
1,307
     
6.3
%
   
3,078
     
7.4
%
   
2,755
     
6.6
%
   Home Meridian
   
2,365
     
2.9
%
   
-
     
0.0
%
   
2,453
     
1.7
%
   
-
         
   All other
   
198
     
8.4
%
   
88
     
4.0
%
   
265
     
6.0
%
   
(224
)
   
-6.4
%
   Intercompany eliminations
   
4
             
8
             
7
             
13
         
Consolidated
 
$
8,224
     
6.0
%
 
$
5,859
     
9.7
%
 
$
12,225
     
4.7
%
 
$
11,101
     
9.2
%
                                                                 
Capital Expenditures
                                                               
   Hooker Casegoods
 
$
342
           
$
571
           
$
722
           
$
940
         
   Upholstery
   
174
             
358
             
208
             
417
         
   Home Meridian
   
(59
)
           
-
             
230
             
-
         
   All other
   
-
             
6
             
-
             
7
         
Consolidated
 
$
457
           
$
935
           
$
1,160
           
$
1,364
         
                                                                 
Depreciation & Amortization
                                                               
   Hooker Casegoods
 
$
548
           
$
478
           
$
1,084
           
$
874
         
   Upholstery
   
236
             
238
             
465
             
459
         
   Home Meridian
   
1,176
             
-
             
3,194
             
-
         
   All other
   
3
             
3
             
5
             
6
         
Consolidated
 
$
1,963
           
$
719
           
$
4,748
           
$
1,339
         
 
   
As of
July 31,
2016
   
%Total
                   
As of
January 31,
2016
   
%Total
                 
Total Assets
         
Assets
                           
Assets
                 
   Hooker Casegoods
 
$
130,236
     
43.9
%
                 
$
146,794
     
80.8
%
               
   Upholstery
   
31,642
     
10.7
%
                   
34,010
     
18.7
%
               
   Home Meridian
   
132,365
     
44.6
%
                   
-
     
0.0
%
               
   All other
   
2,486
     
0.8
%
                   
863
     
0.5
%
               
   Intercompany eliminations
   
(8
)
                           
(14
)
                       
Consolidated
 
$
296,721
     
100.0
%
                 
$
181,653
     
100.0
%
               




15.        Contingencies
 
Customs Penalty

In September 2009, U.S. Customs and Border Protection (“CBP”) issued an audit report asserting that we had not paid all required antidumping duties due with respect to certain bedroom furniture we imported from China. In February 2015, CBP assessed a civil penalty of approximately $2.1 million and unpaid duties of approximately $500,000 on the matter.  In December 2015, in response to our petition to eliminate or modify the assessment, CBP revised the proposed penalty to approximately $1.7 million, while leaving the duty assessment at approximately $500,000.  We continue to assert that no antidumping duties are due and that there is no basis for the imposition of a penalty.  We intend to vigorously defend against the penalty. In the opinion of management, the ultimate disposition of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

16.        Subsequent Events
Dividends
On August 31, 2016, our board of directors declared a quarterly cash dividend of $0.10 per share, payable on September 30, 2016 to shareholders of record at September 16, 2016.


Item 2.            Management’s Discussion and Analysis of Financial Condition and Results of Operations

All references to the “Company,” “we,” “us” and “our” refer to Hooker Furniture Corporation and its consolidated subsidiaries, unless specifically referring to operating segment information. All references to specific quarter periods are referring to our fiscal quarters. Our quarterly periods are based on thirteen-week “reporting periods” (which end on a Sunday) rather than quarterly periods consisting of three calendar months. As a result, each quarterly period generally is thirteen weeks, or 91 days, long, except as noted below. All references to the years 2017, 2016, 2015 and other years are referring to our fiscal years, unless otherwise stated. Our fiscal years end on the Sunday closest to January 31. In some years (generally once every six years) the fourth quarter will be fourteen weeks long and the fiscal year will consist of fifty-three weeks. The 2013 fiscal year that ended on February 3, 2013 was a 53-week fiscal year.

Forward-Looking Statements

Certain statements made in this report, including statements in this section 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 negative thereof, or other variations thereon, 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;
§
the risks related to the recent acquisition of substantially all of the assets and certain liabilities of Home Meridian International, Inc., (“HMI”) including deal-related costs to be recognized in fiscal 2017, integration costs, costs related to acquisition debt, maintaining HMI’s existing customer relationships, debt service costs, interest rate volatility, the use of operating cash flows to service debt to the detriment of other corporate initiatives or strategic opportunities, financial statement charges related to the application of current accounting guidance in accounting for the Acquisition, the recognition of significant additional depreciation and amortization expenses by the combined entity,  the loss of key employees from HMI, the ongoing costs related to the assumption of HMI’s pension liabilities, the disruption of ongoing businesses or inconsistencies in standards, controls, procedures and policies across the companies which could adversely affect our internal control or information systems and the costs of bringing them into compliance and failure to realize benefits anticipated from the Acquisition;
§
the risks specifically related to the Home Meridian segment’s operations including significant concentrations of its sales and accounts receivable in only a few customers;
§
achieving and managing growth and change, and the risks associated with new business lines, acquisitions, restructurings, strategic alliances and international operations;

§
our ability to successfully implement our business plan to increase sales and improve financial performance;
§
changes in actuarial assumptions, the interest rate environment and the return on plan assets related to the Home Meridian segment’s legacy Pension Plan, which can affect future funding obligations, costs and plan liabilities;
§
the cost and difficulty of marketing and selling our products in foreign markets;
§
disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from China and Vietnam, 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;
§
disruptions affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina corporate or divisional administrative facilities or our representative offices in China and Vietnam;
 
§
when or whether our new business initiatives, including, among others, H Contract and Homeware, meet growth and profitability targets;
§
price competition in the furniture industry;
§
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 the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;
§
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 and environmental compliance and remediation costs;
§
the direct and indirect costs associated with the implementation of our Enterprise Resource Planning system, including costs resulting from unanticipated disruptions to our business;
§
adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products;
§
risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;
§
capital requirements and costs;
§
competition from non-traditional outlets, such as catalog and internet retailers and home improvement centers;
§
changes in consumer preferences, including increased demand for lower-quality, lower-priced furniture due to, among other things, declines in consumer confidence, amounts of discretionary income available for furniture purchases and the availability of consumer credit;
§
higher than expected costs associated with product quality and safety, including regulatory compliance costs related to the sale of consumer products and costs related to defective or non-compliant products; and
§
higher than expected employee medical costs.
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 that 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, including our reliance on offshore sourcing, any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward Looking Statements detailed above and Item 1A, “Risk Factors” in our 2016 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 2, 2016, and the twenty-six week period (also referred to as “six months,” “six-month period” or “first half”) that began February 1, 2016, and which both ended July 31, 2016.  This report discusses our results of operations for these periods compared to the fiscal year 2016 thirteen-week period that began May 4, 2015 and the twenty-six week period that began February 2, 2015, which both ended August 2, 2015 and our financial condition as of July 31, 2016 compared to January 31, 2016.


References in this report to:

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and will end January 29, 2017; and

§
the 2016 fiscal year and comparable terminology mean the fiscal year that began February 2, 2015 and ended January 31, 2016.

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 2016 annual report on Form 10-K (“2016 Annual Report”) filed with the SEC on April 15, 2016. Our 2016 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 2016 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

Nature of Operations

Hooker Furniture Corporation (referred to as “we,” “us”, “our” “Hooker” or “the Company”) is a home furnishings marketing, design and logistics company offering worldwide sourcing of residential Hooker Casegoods and upholstery, as well as domestically-produced custom leather and fabric-upholstered furniture in our 93rd year of business. Our February 2016 acquisition of  the assets of Home Meridian International positions us as the third largest publically traded furniture source for the U.S. Furniture Market based on 2015 shipments to U.S. retailers, according to a 2016 survey published by Furniture Today, a leading trade publication. Major Hooker Casegoods product categories include home entertainment, home office, accent, dining, and bedroom furniture in the upper price points sold under the Hooker Furniture brand. Hooker’s residential upholstered seating product lines include (a) Bradington-Young, a specialist in upscale motion and stationary leather furniture, (b) Sam Moore Furniture, a specialist in upscale occasional chairs, settees, sofas and sectional seating with an emphasis on cover-to-frame customization and (c) Hooker Upholstery, imported leather upholstered furniture targeted at the upper-medium price-range. The Homeware product line offers customer-assembled, modular upholstered and Hooker Casegoods products designed for younger and more mobile furniture customers. The H Contract product line supplies upholstered seating and Hooker Casegoods to upscale senior living facilities. Home Meridian’s brands address more moderate price points and some additional channels of distribution not currently served by legacy Hooker Furniture divisions or brands. Home Meridian’s brands include:

§
Pulaski Furniture, specializing in casegoods covering the complete design spectrum: traditional, contemporary, and transitional in a wide range of bedroom, dining room, accent and display cabinets at medium price points,
§
Samuel Lawrence Furniture, specializing in value-conscious offerings in bedroom, dining room, home office and youth furnishings,
§
Prime Resources, value-conscious imported leather upholstered furniture,
§
Right2Home, a supplier to internet furniture retailers, and
§
Samuel Lawrence Hospitality, a designer and supplier of hotel furnishings.

Our corporate and divisional offices and upholstery manufacturing facilities are located in Virginia and North Carolina, and we have showrooms in High Point, North Carolina and Ho Chi Minh City, Vietnam. We operate eight distribution centers in North Carolina, Virginia, California, China and Vietnam. An extensive selection of designs and formats along with finish and cover options in each of our product categories makes us a comprehensive resource for retailers with price points in the lower-medium to lower high-end price ranges.  Our principal customers are retailers of residential home furnishings that are broadly dispersed throughout the United States. Our customers also include home furniture retailers in Canada and in nearly 40 other countries internationally. Other customers include independent furniture stores, mega accounts, specialty retailers, department stores, catalog and internet merchants, interior designers and national and regional chains.


For financial reporting purposes, we are organized into four operating segments – Hooker Casegoods, Upholstery, Home Meridian and an “All other” segment which includes H Contract and Homeware, two new businesses started in 2014. As of July 31, 2016, our operating segments and their associated brands are as follows:

Hooker Furniture Corporation
Operating Segments
             
Hooker Casegoods
 
Upholstery
 
Home Meridian
 
All other
Brands:
 
Brands:
 
Brands:
 
Brands:
Hooker Furniture
 
Bradington-Young
 
Pulaski Furniture
 
H Contract
   
Hooker Upholstery
 
Samuel Lawrence Furniture
 
Homeware
   
Sam Moore
 
Samuel Lawrence Hospitality
   
       
Prime Resources
   
       
Right 2 Home
   

Overview

Our net sales are derived primarily from the sale of household furniture. Home furnishings sales are driven in large part by general economic factors such as consumer confidence, availability of consumer credit, energy and other commodity prices and housing and mortgage markets and lifestyle-driven factors such as changes in fashion trends, disposable income and household formation and turnover.

Historically, our lower overhead, variable-cost import operations helped drive our profitability and provided us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We continually evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers, such as duties and tariffs, diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. We expect the recent acquisition of Home Meridian, whose net sales are derived entirely from imported items, to strengthen and perpetuate this model, although at higher volumes and lower margins than that of our legacy import operations.

As a percentage of sales, our domestic upholstery operations have significantly higher overhead and fixed costs than our import operations, and their profitability has been and can be more significantly affected by economic downturns. Our upholstery segment operations have been profitable since fiscal 2013, with overall profitability improving each year, primarily due to improving profitability in our domestic upholstery, which lagged the import operations during the economic downturn, but are now seeing the impact of cost reduction efforts and improving sales on their operations.

Home Meridian Acquisition

A large amount of furniture is sold in channels and at price points in which we have traditionally not competed.  The Home Meridian acquisition was pursued in order to give us access to new customers and new channels of distribution. We completed the acquisition on the first day of the current fiscal year. We are presently finalizing appraisals and estimates related to our purchase accounting, working to successfully integrate Home Meridian and to leverage best practices between the legacy Hooker organization and Home Meridian in order to lower costs, improve operating efficiencies and grow sales.

Through the first half of fiscal 2017, we have recorded approximately $1.1 million in acquisition expenses and $2.5 million in amortization expense on intangible assets acquired in the acquisition: namely, customer lists, order backlog and certain trade names. We expect to record an additional $667,000 in intangible asset amortization expense during the remainder of fiscal 2017 and expect to record approximately $200,000 additional acquisition-related costs over that same period.

Had the acquisition of the business of Home Meridian occurred at the beginning of fiscal 2016, net sales, net income and diluted earnings per share would have been approximately $140 million, $5.3 million and $0.49 per share, respectively, for the second quarter of fiscal 2016 and approximately $265 million, $9.2 million and $0.85 per share, respectively, for the fiscal 2016 first half. Material non-recurring adjustments excluded from these pro forma adjustments consist of amortization of intangible assets, elimination of transaction related costs and an adjustment of the interest rate on short and long term debt to reflect the interest rates in the Company's amended credit facility.


Executive Summary-Results of Operations

The Home Meridian acquisition closed on the first day of our current fiscal year. Consequently, that segment’s prior year results are not included in the results discussed below.

Consolidated net sales for the fiscal 2017 second quarter and first half more than doubled to $136 million and $258 million, respectively, due primarily to the acquisition of Home Meridian on the first day of the 2017 fiscal year. However, net sales in our legacy Hooker business deceased around 7% in both the second quarter and first half, driven primarily by net sales decreases in the Hooker Casegoods and Upholstery segments of 10% and 4.1%, respectively, as compared to the prior year quarter and decreases of 12% and 0.6%, respectively, as compared to the first half of the prior year.

Consolidated net income for the fiscal 2017 second quarter increased $1.4 million or 35.8% as compared to the prior year quarter and increased for the fiscal 2017 first half by $438,000 or 5.9% as compared to the prior year first half.

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2017 second quarter and first half operations:

§
Gross profit. Consolidated gross profit increased primarily due to the acquisition of Home Meridian and, to a lesser extent, improved gross profit in our Upholstery and All other operating segments. These increases were partially offset by decreased gross profit in our Hooker Casegoods segment due to decreased sales. However, as a percentage of net sales, gross margins in the Hooker Casegoods segment increased slightly due primarily to lower ocean freight costs.

§
Selling and administrative expenses. Consolidated selling and administrative (S&A) expenses decreased as a percentage of net sales for both the fiscal 2017 second quarter and first half periods, primarily due to the addition of Home Meridian’s operations. However, Hooker Casegoods segment S&A expenses increased in absolute terms and as a percentage of net sales in the fiscal 2017 first half, primarily due to the inclusion of approximately $1.0 million of acquisition-related costs during the fiscal 2017 first quarter.

§
Intangible asset amortization expense. The Home Meridian segment recorded amortization expense of $813,000 in the fiscal 2017 second quarter and $2.5 million of amortization expense in the fiscal 2017 first half for acquisition-related intangibles.

§
Operating income. Consolidated operating income increased $2.4 million in the fiscal 2017 second quarter and $1.2 million in the fiscal 2017 first half, primarily due to the Home Meridian acquisition, partially offset in both periods by decreased Hooker Casegoods segment operating income due to the factors discussed above and in greater detail in the analysis below.

Review

While there were some encouraging developments during the second quarter and first half, overall, we were disappointed with our results. The slow down at retail we first noted during the second half of fiscal 2016 persisted during the fiscal 2017 first half. These conditions appear to have affected much of the home furnishings industry. We believe the weakness was due to general economic uncertainty which has impacted US retail in recent quarters and, to a lesser extent, low energy prices negatively impacting consumers in oil and gas producing states where some of our best customers are located. In general, retailers of all sizes have not been as willing to make inventory investments as they were last year, which is particularly affecting our Hooker Casegoods and Home Meridian segments. Our upholstery segment reported a 4.1% sales decrease for the quarter and essentially flat sales for the first half. Hooker Upholstery’s first quarter double-digit sales growth momentum was derailed by a quality issue which resulted in delayed shipments during the second quarter, resulting in essentially flat sales in that division in the first half.


Despite these challenges, we note some positive developments during the first half. After achieving its first profitable year in fiscal 2016, Sam Moore continued its profitable performance with operating income improvements of over 80% and 60%, respectively, for the second quarter and the first half of fiscal 2017. We attribute the operating income improvements at Sam Moore to exiting low or unprofitable sales in the prior-year and to improved production. Sam Moore also reported mid-single digit sales growth during the second quarter. Product costs decreased during the second quarter and first half due to lower shipping costs in both the Hooker Casegoods and Home Meridian segments, as well as the Hooker Upholstery division of the Upholstery segment. The extent to which these lower costs will last is unknown. Additionally, the Home Meridian segment enters the second half of fiscal 2017 with the largest order backlog in its history due to growth in emerging distribution channels in that segment, which we believe will drive improved sales results in that segment in the second half of the fiscal year versus the first half of fiscal 2017.

Although a small component of our overall results, our All other segment delivered encouraging results for the quarter. H Contract reported a 23% increase in net sales for the quarter and a 45% increase in net sales the first half. While Homeware’s net sales have decreased compared to prior year due to delays related to the sourcing of its new imported product line, its operating loss decreased by over 65% from the prior year quarter and 69% from the first half of the prior year due primarily to improved gross profit and lower S&A expenses as a percentage of net sales. We will continue to assess Homeware’s operating performance as these new, better-value product offerings become available to ship.


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
 
   
July 31,
   
August 2,
   
July 31,
   
August 2,
 
   
2016
   
2015
   
2016
   
2015
 
Net sales
   
100.00
%
   
100.00
%
   
100.00
%
   
100.00
%
Cost of sales
   
79.1
     
73.2
     
78.7
     
73.2
 
Gross profit
   
20.9
     
26.8
     
21.3
     
26.8
 
Selling and administrative expenses
   
14.3
     
17.0
     
15.7
     
17.6
 
Intangible asset amortization
   
0.6
     
-
     
1.0
     
-
 
Operating income
   
6.0
     
9.7
     
4.7
     
9.2
 
Other income, net
   
0.2
     
0.1
     
0.2
     
0.2
 
Interest expense, net
   
0.2
     
-
     
0.2
     
-
 
Income before income taxes
   
6.0
     
9.8
     
4.7
     
9.3
 
Income tax expense
   
2.1
     
3.3
     
1.7
     
3.2
 
Net income
   
3.9
     
6.5
     
3.0
     
6.1
 

Fiscal 2017 Second Quarter Compared to Fiscal 2016 Second Quarter

Second Quarter Results of Operations

   
Net Sales
 
   
Thirteen Weeks Ended
 
   
July 31, 2016
         
August 2, 2015
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
33,582
     
24.7
%
 
$
37,314
     
62.0
%
 
$
(3,732
)
   
-10.0
%
Upholstery
   
19,847
     
14.6
%
   
20,696
     
34.4
%
   
(849
)
   
-4.1
%
All Other
   
2,372
     
1.7
%
   
2,193
     
3.6
%
   
179
     
8.2
%
Intercompany Eliminations
                   
(63
)
           
63
         
Total excl. Home Meridian
   
55,801
     
41.0
%
   
60,140
     
100
%
   
(4,339
)
   
-7.2
%
Home Meridian
   
80,362
     
59.0
%
   
-
     
0.0
%
   
80,362
         
  Consolidated
   
136,163
     
100
%
   
60,140
     
100
%
   
76,023
     
126.4
%



 
Unit Volume
 
FY17 Q2 %
Increase/
-Decrease
vs. FY16 Q2
   
Average Selling Price
 
FY17 Q2 %
Increase/
-Decrease
vs. FY16 Q2
 
                 
Hooker Casegoods
   
-9.3
%
 
Hooker Casegoods
   
-0.6
%
Upholstery
   
-5.7
%
 
Upholstery
   
2.3
%
All Other
   
-9.1
%
 
All Other
   
17.3
%
Total excl. Home Meridian
   
-8.2
%
 
Total exclu. Home Meridian
   
1.3
%
Home Meridian
   
-
   
Home Meridian
   
-
 
Consolidated
   
-8.2
%
 
Consolidated
   
1.3
%
The increase in consolidated net sales was primarily due to the acquisition of Home Meridian on the first day of fiscal 2017. Sales increases in our All other segment are primarily due to increased sales at H Contract as that business continues to expand its customer and geographic bases. Upholstery segment decreases were driven primarily by a quality-related issue which negatively affected second-quarter sales at Hooker Upholstery. We believe Hooker Casegoods segment sales decreased primarily due to sluggish retail furniture sales, a trend which began in the second half of fiscal 2016 and one that seems generally consistent with that of the overall home furnishings industry.
   
Gross Income and Margin
 
   
Thirteen Weeks Ended
 
   
July 31, 2016
         
August 2, 2015
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
10,662
     
31.7
%
 
$
10,904
     
29.2
%
 
$
(242
)
   
-2.2
%
Upholstery
   
4,642
     
23.4
%
   
4,532
     
21.9
%
   
110
     
2.4
%
All Other
   
757
     
31.9
%
   
649
     
29.6
%
   
108
     
16.6
%
Intercompany Eliminations
   
4
             
8