10-Q 1 hookerfurniture10q102917.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 October 29, 2017

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, 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 ☐ (Do not check if a smaller reporting company)  
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 ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of December 1, 2017:
 
Common stock, no par value
11,762,409
(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 1A.
Risk Factors  37
     
Item 6.
38
 
 
 
39
 
 
PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements

HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
             
As of
 
October 29,
   
January 29,
 
   
2017
   
2017
 
   
(unaudited)
       
Assets
           
Current assets
           
    Cash and cash equivalents
 
$
32,357
   
$
39,792
 
    Trade accounts receivable, net
   
79,850
     
92,578
 
    Inventories
   
83,550
     
75,303
 
    Income Tax Recoverable
   
954
     
-
 
    Prepaid expenses and other current assets
   
5,220
     
4,244
 
         Total current assets
   
201,931
     
211,917
 
Property, plant and equipment, net
   
30,846
     
25,803
 
Cash surrender value of life insurance policies
   
23,322
     
22,366
 
Deferred taxes
   
5,512
     
7,264
 
Intangible assets, net
   
37,825
     
25,923
 
Goodwill
   
40,832
     
23,187
 
Other assets
   
2,249
     
2,236
 
         Total non-current assets
   
140,586
     
106,779
 
               Total assets
 
$
342,517
   
$
318,696
 
                 
Liabilities and Shareholders’ Equity
               
Current liabilities
               
    Current portion of term loan
 
$
7,526
   
$
5,817
 
    Trade accounts payable
   
33,748
     
36,552
 
    Accrued salaries, wages and benefits
   
8,373
     
8,394
 
    Income tax accrual
   
-
     
4,323
 
    Customer deposits
   
4,290
     
5,605
 
    Other accrued expenses
   
3,338
     
3,369
 
         Total current liabilities
   
57,275
     
64,060
 
Long term debt
   
47,660
     
41,772
 
Deferred compensation
   
11,043
     
10,849
 
Pension plan
   
3,017
     
3,499
 
Other long-term liabilities
   
852
     
589
 
Total long-term liabilities
   
62,572
     
56,709
 
              Total liabilities
   
119,847
     
120,769
 
                 
Shareholders’ equity
               
    Common stock, no par value, 20,000 shares authorized,
    11,762 and 11,563 shares issued and outstanding on each date
   
48,910
     
39,753
 
    Retained earnings
   
173,245
     
157,688
 
    Accumulated other comprehensive income
   
515
     
486
 
              Total shareholders’ equity
   
222,670
     
197,927
 
                   Total liabilities and shareholders’ equity
 
$
342,517
   
$
318,696
 

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
   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
   
October 29,
   
October 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net sales
 
$
157,934
   
$
145,298
   
$
445,114
   
$
403,292
 
                                 
   Cost of sales
   
123,656
     
114,372
     
349,576
     
317,289
 
                                 
      Gross profit
   
34,278
     
30,926
     
95,538
     
86,003
 
                                 
Selling and administrative expenses
   
22,449
     
20,653
     
64,139
     
61,038
 
Intangible asset amortization
   
624
     
334
     
1,291
     
2,801
 
                                 
        Operating income
   
11,205
     
9,939
     
30,108
     
22,164
 
                                 
Other income, net
   
330
     
218
     
1,052
     
636
 
Interest expense, net
   
327
     
245
     
860
     
755
 
                                 
      Income before income taxes
   
11,208
     
9,912
     
30,300
     
22,045
 
                                 
Income tax expense
   
4,006
     
3,453
     
10,574
     
7,737
 
                                 
       Net income
 
$
7,202
   
$
6,459
   
$
19,726
   
$
14,308
 
                                 
Earnings per share
                               
       Basic
 
$
0.62
   
$
0.56
   
$
1.70
   
$
1.24
 
       Diluted
 
$
0.61
   
$
0.56
   
$
1.69
   
$
1.23
 
                                 
Weighted average shares outstanding:
                               
       Basic
   
11,679
     
11,537
     
11,596
     
11,528
 
       Diluted
   
11,700
     
11,559
     
11,626
     
11,556
 
                                 
Cash dividends declared per share
 
$
0.12
   
$
0.10
   
$
0.36
   
$
0.30
 

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
   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
   
October 29,
   
October 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net Income
 
$
7,202
   
$
6,459
   
$
19,726
   
$
14,308
 
       Other comprehensive income (loss):
                               
                 Amortization of actuarial loss (gain)
   
15
     
(18
)
   
46
     
(53
)
                 Income tax effect on amortization
   
(5
)
   
7
     
(17
)
   
19
 
        Adjustments to net periodic benefit cost
   
10
     
(11
)
   
29
     
(34
)
                                 
Total comprehensive Income
 
$
7,212
   
$
6,448
   
$
19,755
   
$
14,274
 

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)

   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
 
   
2017
   
2016
 
Operating Activities:
           
Net income
 
$
19,726
   
$
14,308
 
Adjustments to reconcile net income to net cash
provided by operating activities:
               
Depreciation and amortization
   
4,399
     
6,340
 
Gain on disposal of assets
   
(37
)
   
(60
)
Deferred income tax expense (benefit)
   
1,735
     
(1,767
)
Noncash restricted stock and performance awards
   
1,175
     
927
 
Provision for doubtful accounts
   
125
     
(168
)
Gain on life insurance policies
   
(453
)
   
(665
)
Changes in assets and liabilities:
               
Trade accounts receivable
   
16,179
     
(105
)
Income tax recoverable
   
(954
)
   
-
 
Inventories
   
(5,867
)
   
6,597
 
Prepaid expenses and other current assets
   
(836
)
   
(306
)
Trade accounts payable
   
(3,529
)
   
(319
)
Accrued salaries, wages, and benefits
   
(539
)
   
(332
)
Accrued income taxes
   
(4,323
)
   
1,142
 
Customer deposits
   
(1,314
)    
4,485
 
Other accrued expenses
   
(254
)
   
2,409
 
Deferred compensation
   
(435
)
   
(1,265
)
Other long-term liabilities
   
267
     
44
 
              Net cash provided by operating activities
 
$
25,065
   
$
31,265
 
                 
Investing Activities:
               
Acquisitions
 
$
(32,650
)
 
$
(86,062
)
Purchases of property and equipment
   
(2,708
)
   
(1,905
)
Proceeds received on notes from sale of assets
   
98
     
116
 
Proceeds received on life insurance policies
   
-
     
908
 
Premiums paid on life insurance policies
   
(639
)
   
(682
)
              Net cash used in investing activities
   
(35,899
)
   
(87,625
)
                 
Financing Activities:
               
Proceeds from long-term debt
 
$
12,000
   
$
60,000
 
Payments for long-term debt
   
(4,393
)
   
(10,825
)
Debt issuance cost
   
(39
)
   
(165
)
Cash dividends paid
   
(4,169
)
   
(3,466
)
              Net cash provided by financing activities
   
3,399
     
45,544
 
                 
Net decrease in cash and cash equivalents
   
(7,435
)
   
(10,816
)
Cash and cash equivalents - beginning of year
   
39,792
     
53,922
 
Cash and cash equivalents - end of quarter
 
$
32,357
   
$
43,106
 
                 
Supplemental disclosure of cash flow information:
               
Cash paid for income taxes
 
$
14,103
   
$
8,360
 
Cash paid for interest, net
   
754
     
547
 
Non-cash transactions:
               
Acquisition cost paid in common stock
 
$
8,396
   
$
20,267
 
Increase in property and equipment through accrued purchases
   
26
     
22
 

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


HOOKER FURNITURE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar and share amounts in tables, except per share amounts, in thousands unless otherwise indicated)
(Unaudited)
For the Thirty-Nine Weeks Ended October 29, 2017


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”). All references to the “Hooker”, “Hooker Division” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Casegoods and Upholstery operating segments, including Shenandoah since its characteristics (e.g. management, price points, margins and domestic manufacturing base), are like that of the other components of what we previously defined as the “legacy Hooker” business. 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 29, 2017 (“2017 Annual Report”). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect both the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from our estimates. Operating results for the interim periods reported herein may not be indicative of the results expected for the fiscal year.

The financial statements contained herein are being filed as part of a quarterly report on Form 10-Q covering the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began July 31, 2017, and the thirty-nine week period (also referred to as “nine months,” “nine-month period” or “year-to-date period”) that began January 30, 2017, which both ended October 29, 2017,  compared to the  thirteen-week period that began August 1, 2016 and the thirty-nine week period that began February 1, 2016, which both ended October 30, 2016; and our financial condition as of October 29, 2017 compared to January 29, 2017.

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

§
the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and will end January 28, 2018; and

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and ended January 29, 2017.

References in this document to “SFI” refer to the counterparties to the asset purchase agreement, Shenandoah Furniture, Inc. and its two former shareholders, entered into on September 6, 2017. References in this document to “Shenandoah” or “Shenandoah Furniture” refer to the newly acquired business operations of SFI acquired on September 29, 2017.

On September 29, 2017, we acquired substantially all of the assets and assumed certain liabilities of SFI for $32.7 million in cash and the issuance of 176,018 shares of our common stock valued at $8.4 million (such numbers are subject to agreed upon post-closing working capital adjustments). Based on the way we manage, evaluate and internally report our operations, we determined that Shenandoah’s newly acquired business will be reported in our Upholstery segment.

The results of operations of Shenandoah are included in our results of operations beginning on September 29, 2017 through the end of our fiscal 2018 third quarter ended on October 29, 2017. Consequently, comparable prior-year information for Shenandoah is not included in the financial statements presented in this report. The acquisition is discussed in greater detail below in Note 2. “Acquisition.”


In May 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance for the recognition of revenue from contracts with customers. Subsequent Accounting Standards Updates have been issued to provide clarity and defer the effective date of the new guidance. The new revenue recognition standard eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach. Our analysis to date has included reviewing material agreements and sales policies and procedures, interviewing sales and customer care management and analyzing those findings based on the five-step model described in the new standard.  Additionally, we have decided to implement the standard using the modified retrospective adjustment method as a cumulative-effect adjustment as of the date of adoption. Implementation matters remaining include completing our analysis, assessing accounting policy elections and disclosures under the new guidance and evaluating the systems and processes to support any possible changes to our revenue recognition practices. Based on our analysis to date, we do not believe the standard will have a material effect on our financial statements. However, our analysis is not yet complete and this preliminary conclusion is subject to change. The new revenue recognition guidance is effective for us beginning in fiscal 2019, which begins on January 29, 2018.


2.
Acquisition

On September 29, 2017, we completed the previously announced acquisition (the “Acquisition”) of substantially all of the assets of SFI pursuant to the Asset Purchase Agreement the Company and SFI entered into on September 6, 2017 (the “Asset Purchase Agreement”).  Upon completion and subject to post-closing working capital adjustments, the Company paid $32.7 million in cash (the “Cash Consideration”) and issued 176,018 shares of the Company’s common stock (the “Stock Consideration”) to the shareholders of SFI as consideration for the Acquisition. The Cash Consideration included an additional payment of approximately $650,000 pursuant to working capital adjustments provided for in the Asset Purchase Agreement. The number of shares of common stock issued at closing for the Stock Consideration was determined by reference to the mean closing price of the Company’s common stock for the ten trading days immediately preceding the business day preceding the closing date ($45.45).  Under the Asset Purchase Agreement, we also assumed certain liabilities of SFI. The assumed liabilities did not include the indebtedness (as defined in the Asset Purchase Agreement) of SFI.

Also on September 29, 2017, we entered into a second 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 amends and restates the amended and restated loan agreement the Company entered into with BofA on February 1, 2016, in connection with its acquisition of the substantially all of the assets of Home Meridian International, Inc. The Amended and Restated Loan Agreement provides us with a new $12 million unsecured term loan (the “New Unsecured Term Loan”). On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan in connection with the completion of the Acquisition. For additional details regarding the Loan Agreement, see Note 9.  “Debt,” below.

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 SFI 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 estimates of the fair values of the identifiable assets acquired and liabilities assumed in the Acquisition as of September 29, 2017. Inventory, prepaids and accounts payable values have been finalized. We are currently reviewing the net working capital adjustment as specified in the Asset Purchase Agreement, consequently, the accounts receivable, and accrued expenses values are subject to change. The preliminary estimates of fair value of property and equipment, intangible assets and goodwill are preliminary values, and subject to change as our appraisals and estimates are finalized during the fiscal 2018 fourth quarter.



Fair value estimates of assets acquired and liabilities assumed
     
Purchase price consideration
     
     Cash paid for assets acquired, including working capital adjustment
 
$
32,650
 
     Value of shares issued for assets acquired
   
8,000
 
     Fair value adjustment to shares issued for assets acquired*
   
396
 
Total purchase price
 
$
41,046
 
         
   Accounts receivable
 
$
3,576
 
   Inventory
   
2,380
 
   Prepaid expenses and other current assets
   
52
 
   Property and equipment
   
5,418
 
   Intangible assets
   
13,193
 
   Goodwill
   
17,645
 
   Accounts payable
   
(699
)
   Accrued expenses
   
(519
)
Total purchase price
 
$
41,046
 

*As provided by the Asset Purchase Agreement, we calculated the number of common shares issued to SFI by dividing $8 million by the mean closing price of our common stock for the ten trading days immediately preceding the business day immediately preceding the closing date ($45.45). However, U.S. Generally Accepted Accounting Standards provide that we value stock consideration exchanged in the Acquisition at fair value. Consequently, we adjusted the purchase price by $396,000, which represents the difference in the mean closing price of our common shares described in this paragraph and the price on September 29, 2017, multiplied by the number of common shares issued (176,018.)  No additional consideration was transferred to SFI as a result of this adjustment.
 
Property and equipment were recorded at fair value and primarily consist of machinery and equipment and leasehold improvements. Property and equipment will be amortized over their estimated useful lives and leasehold improvements will be amortized over the lesser of their useful lives or the remaining lease period.
 
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 in expected to be deductible for income tax purposes.
 
Intangible assets, consist of three separately identified assets:

§
Shenandoah customer relationships, which are definite-lived intangible assets with an aggregate fair value of $12.1 million. The customer relationships are amortizable and will be amortized over a period of thirteen years;
§
The Shenandoah tradename, an indefinite lived intangible asset with a fair value of $645,000. The tradename is not subject to amortization, but will be evaluated annually, and as circumstances dictate, for impairment; and
§
Shenandoah’s order backlog which is a definite-lived intangible asset with an aggregate fair value of $479,000 that we will amortize over four months, with most of the expense recognized in the fiscal 2018 fourth quarter.
 
The total weighted average amortization period for these assets is 12.5 years.


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, 2016:

   
13 Weeks Ended
   
39 Weeks Ended
 
   
October 30, 2016
   
October 30, 2016
 
   
(Pro forma)
   
(Pro forma)
 
Net Sales
 
$
156,570
   
$
434,921
 
Net Income
 
$
7,268
   
$
16,257
 
Basic EPS
 
$
0.63
   
$
1.41
 
Diluted EPS
 
$
0.62
   
$
1.39
 
 
 
 
Pro Forma - Unaudited
 
 
 
13 Weeks Ended
   
39 Weeks Ended
 
 
 
October 29, 2017
   
October 29, 2017
 
 
 
(Pro forma)
   
(Pro forma)
 
Net Sales
 
$
165,777
   
$
474,610
 
Net Income
 
$
9,218
   
$
24,223
 
Basic EPS
 
$
0.79
   
$
2.09
 
Diluted EPS
 
$
0.78
   
$
2.06
 

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 adjustments included in the pro forma financial information in the table above consist of amortization of intangible assets, elimination of transaction related costs in fiscal 2018 proforma results and recording of interest on short and long-term debt incurred to facilitate this transaction.

The unaudited pro forma results do not reflect events that either have occurred or may occur after the Acquisition, including, but not limited to, the anticipated realization of savings from operating synergies in subsequent periods. 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 have incurred approximately $700,000 in Acquisition-related costs so far in fiscal 2018. These expenses are included in the “Selling and administrative expenses” line of our condensed consolidated statements of income. Included in our fiscal 2018 third quarter and year-to-date results are Shenandoah’s October results, which include $3.1 million in net sales and $197,000 of operating income, including $290,000 in intangible amortization expense.



3.          Shareholders’ Equity

The number of shares and the amount of common stock outstanding changed materially from the end of the 2017 fiscal year, as a result of issuing 176,018 shares of common stock to the shareholders of SFI 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 2018 third 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 29, 2017
   
11,563
   
$
39,753
 
Shares issued for Acquisition
   
176
     
8,396
 
Restricted share grants
   
23
     
431
 
Restricted stock compensation costs
   
-
     
330
 
Outstanding shares October 29, 2017
   
11,762
   
$
48,910
 


4.          Accounts Receivable

   
October 29,
   
January 29,
 
   
2017
   
2017
 
             
Trade accounts receivable
 
$
86,409
   
$
99,378
 
Receivable from factor
   
-
     
6
 
Other accounts receivable allowances
   
(5,630
)
   
(6,298
)
Allowance for doubtful accounts
   
(929
)
   
(508
)
   Accounts receivable
 
$
79,850
   
$
92,578
 


5.
Inventories
          
   
October 29,
   
January 29,
 
   
2017
   
2017
 
Finished furniture
 
$
91,624
   
$
85,520
 
Furniture in process
   
1,338
     
735
 
Materials and supplies
   
9,444
     
7,536
 
   Inventories at FIFO
   
102,406
     
93,791
 
Reduction to LIFO basis
   
(18,856
)
   
(18,488
)
   Inventories
 
$
83,550
   
$
75,303
 




6.          Property, Plant and Equipment

   
Depreciable Lives
   
October 29,
   
January 29,
 
   
(In years)
   
2017
   
2017
 
                   
Buildings and land improvements
 
15 - 30
   
$
24,073
   
$
23,392
 
Computer software and hardware
 
3 - 10
     
18,181
     
17,308
 
Machinery and equipment
 
10
     
8,448
     
5,031
 
Leasehold improvements
 
Term of lease
     
9,470
     
7,104
 
Furniture and fixtures
 
3 - 8
     
2,181
     
1,903
 
Other
 
5
     
660
     
562
 
Total depreciable property at cost
         
63,013
     
55,300
 
Less accumulated depreciation
         
34,160
     
31,167
 
Total depreciable property, net
         
28,853
     
24,133
 
Land
         
1,067
     
1,067
 
Construction-in-progress
         
926
     
603
 
Property, plant and equipment, net
   
$
30,846
   
$
25,803
 


7.          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 October 29, 2017 and January 29, 2017, 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.

As of January 29, 2017, our Pension Plan (the “Plan”) assets 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 January 31, 2017, 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 January 31, 2017, the net liability for this plan was $3.5 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 January 31, 2017, the actuarial valuation date of the Pension Plan.  See Note 10. “Employee Benefit Plans” for additional information about the Plan.



Our assets measured at fair value on a recurring basis at October 29, 2017 and January 29, 2017, were as follows:

   
Fair value at October 29, 2017
   
Fair value at January 29, 2017
 
Description
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Level 1
   
Level 2
   
Level 3
   
Total
 
                                                 
Assets measured at fair value
                                               
Company-owned life insurance
 
$
-
   
$
23,322
   
$
-
   
$
23,322
   
$
-
   
$
22,366
   
$
-
   
$
22,366
 
Pension plan assets*
   
13,881
     
-
     
-
     
13,881
     
13,881
     
-
     
-
     
13,881
 
 
* as of January 29, 2017 for Pension Plan assets.

 
8.          Intangible Assets

During the fiscal 2018 third quarter, we recorded both non-amortizable and amortizable intangible assets as a result of the Acquisition. Shenandoah’s 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 Home Meridian reportable segments, are as follows:

      
October 29,
   
January 29,
 
 
Segment
 
2017
   
2017
 
Non-amortizable Intangible Assets
             
Goodwill
Home Meridian
 
$
23,187
   
$
23,187
 
Goodwill
Upholstery
 
$
17,645
     
-
 
Trademarks and trade names - Home Meridian
Home Meridian
   
11,400
     
11,400
 
Trademarks and trade names - Bradington-Young
Upholstery
   
861
     
861
 
Trademarks and trade names - Shenandoah
Upholstery
   
645
     
-
 
Trademarks and trade names - Sam Moore
Upholstery
   
396
     
396
 
   Total non-amortizable assets
   
$
54,134
   
$
35,844
 

Our amortizable intangible assets consist of customer relationships, trademarks and order backlog and are recorded in the Home Meridian and Upholstery segments. The estimated amortization expense associated with these assets is expected to be as follows:

Fiscal Year
 
Amount
 
       
Remainder of 2018
 
$
833
 
2019
   
2,263
 
2020
   
2,263
 
2021
   
2,263
 
2022
   
2,263
 
Thereafter
   
14,640
 
   
$
24,525
 

Accumulated amortization on intangible assets was $4.4 million at October 29, 2017 and was $3.1 million at January 29, 2017.


9.          Debt

On September 29, 2017, we entered into a loan agreement (the “Loan Agreement”) with Bank of America, N.A. (“BofA”) in connection with the completion of the Acquisition discussed in Note 2 Acquisition, above.  The Loan Agreement amends and restates the amended and restated loan agreement that the Company entered into with BofA on February 1, 2016. The Loan Agreement provides us with the New Unsecured Term Loan of $12 million.

Amounts outstanding under the New 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 the principal amount borrowed under the New Unsecured Term Loan in monthly installments of approximately $143,000, together with any accrued interest, until the full amount borrowed is repaid or until the earlier of September 30, 2022 or the expiration of the Company’s existing $30 million revolving credit facility (the “Existing Revolver”), at which time all amounts outstanding under the New Unsecured Term Loan will become due and payable. We may prepay the outstanding principal amount under the New Unsecured Term Loan, in full or in part, on any interest payment date without penalty. On September 29, 2017, we borrowed the full $12 million available under the New Unsecured Term Loan.
 
Additionally, we incurred $39,000 in debt issuance costs in connection with our term loans in the fiscal 2018 third quarter. 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 October 29, 2017, including the debt issuance costs in connection with a previous acquisition, total unamortized loan costs of $131,000 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 ratio of funded debt to EBITDA not exceeding:
o
2.50:1.0 through August 31, 2018;
o
2.25:1.0 through August 31, 2019; and
o
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.
 
We were in compliance with each of these financial covenants at October 29, 2017 and expect to remain in compliance with existing covenants through fiscal 2018 and for the foreseeable future.
 
As of October 29, 2017, we had an aggregate $28.5 million available under our Existing Revolver to fund working capital needs. Standby letters of credit in the aggregate amount of $1.5 million, used to collateralize certain insurance arrangements and for imported product purchases, were outstanding under the Existing Revolver as of October 29, 2017.  There were no additional borrowings outstanding under the Existing Revolver on October 29, 2017.



10.      Employee Benefit Plans

We maintain three retirement plans for the benefit of certain former and current employees, including a supplemental retirement income plan (“SRIP”) for certain former and current employees of Hooker Furniture Corporation, as well as two plans for the benefit of certain and former employees of Pulaski Furniture Corporation, one of two entities combined to form Home Meridian International. These legacy pension plan obligations include:

§
the Pulaski Furniture Corporation Supplemental Executive Retirement Plan (“SERP”) for certain former executives. The SERP is an unfunded plan and all benefits are paid solely out of our general assets; and
§
the Pulaski Furniture Corporation Pension Plan (“Pension Plan”) for former Pulaski Furniture Corporation employees.

The SRIP, SERP and Pension Plan are all “frozen” and we do not expect to add additional 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 1 inputs, which are quoted prices in active markets.

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
   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
   
October 29,
   
October 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net periodic benefit costs
                       
      Service cost
   
76
     
94
     
228
     
282
 
      Interest cost
   
280
     
295
     
839
     
885
 
      Actuarial loss (gain)
   
15
     
(18
)
   
45
     
(54
)
      Expected return on pension plan assets
   
(234
)
   
(197
)
   
(700
)
   
(591
)
      Expected administrative expenses
   
70
     
70
     
210
     
210
 
                                 
Consolidated net periodic benefit costs
 
$
207
   
$
244
   
$
622
   
$
732
 
 
The expected long-term rate of return on Pension Plan assets is 7.0% as of the Pension Plan’s most recent valuation date of January 29, 2017. We contributed $511,000 in required contributions to the Pension Plan in the first nine months of fiscal 2018. There are no required Pension Plan contributions due during the remainder of fiscal 2018. The SRIP and SERP plans are unfunded plans. Consequently, we expect to pay a total of approximately $210,000 in benefit payments from our general assets during the remainder of fiscal 2018 to fund SRIP and SERP payments.


11.          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 2017 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:

   
October 29,
   
January 29,
 
   
2017
   
2017
 
             
Restricted shares
   
16
     
26
 
Restricted stock units
   
19
     
20
 
     
35
     
46
 



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
   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
   
October 29,
   
October 30,
 
   
2017
   
2016
   
2017
   
2016
 
                         
Net income
 
$
7,202
   
$
6,459
   
$
19,726
   
$
14,308
 
   Less: Unvested participating restricted stock dividends
   
2
     
3
     
8
     
8
 
            Net earnings allocated to unvested participating restricted stock
   
10
     
14
     
37
     
32
 
Earnings available for common shareholders
   
7,190
     
6,442
     
19,681
     
14,268
 
                                 
Weighted average shares outstanding for basic earnings per share
   
11,679
     
11,537
     
11,596
     
11,528
 
Dilutive effect of unvested restricted stock and RSU awards
   
21
     
22
     
30
     
28
 
   Weighted average shares outstanding for diluted earnings per share
   
11,700
     
11,559
     
11,626
     
11,556
 
                                 
Basic earnings per share
 
$
0.62
   
$
0.56
   
$
1.70
   
$
1.24
 
                                 
Diluted earnings per share
 
$
0.61
   
$
0.56
   
$
1.69
   
$
1.23
 


12.      Income Taxes
 
We recorded income tax expense of $4 million for the fiscal 2018 third quarter compared to $3.5 million for the comparable prior year period. The effective tax rates for the fiscal 2018 and 2017 third quarter were 35.7% and 34.8%, respectively. Our effective tax rate was higher in the fiscal 2018 third quarter primarily due to higher state tax expenses as the result of expanding territory.

We recorded income tax expense of $10.6 million for the fiscal 2018 first nine months, compared to $7.7 million for the same prior-year period.  The effective tax rates for the first nine months of fiscal 2018 and 2017 were 34.9% and 35.1%, respectively. The effective tax rate was lower in the 2018 first nine months due to the settlement of an uncertain tax position on captive insurance, excess tax benefits from share-based compensation and a state tax credit received during the first quarter of fiscal 2018.

The net unrecognized tax benefits as of October 29, 2017 and January 29, 2017, which, if recognized, would affect our effective tax rate are $129,000 and $201,000, respectively.

Tax years ending February 2, 2014 through January 29, 2017 remain subject to examination by federal and state taxing authorities.


13.          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 Accounting Standards Codification Topic 280, “Segment Reporting” (“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 four reportable segments:

§
Hooker Casegoods, an imported casegoods business; 
§
Upholstery, which includes the domestic upholstery manufacturing operations of Bradington-Young, Sam Moore, Shenandoah Furniture and the imported upholstery operations of Hooker Upholstery;
§
Home Meridian, a business acquired at the beginning of fiscal 2017, is a stand-alone, mostly autonomous business that serves a different type or class of customer than do our other operating segments and at much lower margins; and
§
All other, which includes H Contract and Homeware, two businesses started in 2013. Neither of these segments met the ASC 280 aggregation criteria nor were individually reportable; therefore, we combined them in an “All other” segment in accordance with ASC 280. We note that Homeware failed to reach critical mass and its operations were wound down during the fiscal 2018 second quarter.
 
 
 

 

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

   
Thirteen Weeks Ended
   
Thirty-Nine Weeks Ended
 
   
October 29,
         
October 30
         
October 29,
         
October 30
       
   
2017
         
2016
         
2017
         
2016
       
         
% Net
         
% Net
         
% Net
         
% Net
 
Net Sales
       
Sales
         
Sales
         
Sales
         
Sales
 
   Hooker Casegoods
 
$
36,373
     
23.0
%
 
$
36,861
     
25.4
%
 
$
104,067
     
23.4
%
 
$
103,372
     
25.6
%
   Upholstery
   
26,701
     
16.9
%
   
19,664
     
13.5
%
   
71,247
     
16.0
%
   
61,404
     
15.2
%
   Home Meridian
   
92,068
     
58.3
%
   
86,053
     
59.2
%
   
262,173
     
58.9
%
   
231,391
     
57.4
%
   All other
   
2,792
     
1.8
%
   
2,720
     
1.9
%
   
7,627
     
1.7
%
   
7,125
     
1.8
%
   Intercompany eliminations
   
-
             
-
             
-
             
-
         
Consolidated
 
$
157,934
     
100.0
%
 
$
145,298
     
100
%
 
$
445,114
     
100.0
%
 
$
403,292
     
100
%
                                                                 
Gross Profit
                                                               
   Hooker Casegoods
 
$
11,346
     
31.2
%
 
$
12,081
     
32.8
%
 
$
32,984
     
31.7
%
 
$
32,897
     
31.8
%
   Upholstery
   
6,190
     
23.2
%
   
4,311
     
21.9
%
   
17,255
     
24.2
%
   
14,029
     
22.8
%
   Home Meridian
   
15,808
     
17.2
%
   
13,742
     
16.0
%
   
42,875
     
16.4
%
   
36,865
     
15.9
%
   All other
   
934
     
33.4
%
   
791
     
29.1
%
   
2,420
     
31.7
%
   
2,204
     
30.9
%
   Intercompany eliminations
   
-
             
1
             
4
             
8
         
Consolidated
 
$
34,278
     
21.7
%
 
$
30,926
     
21.3
%
 
$
95,538
     
21.5
%
 
$
86,003
     
21.3
%
                                                                 
Operating Income
                                                               
   Hooker Casegoods
 
$
3,990
     
11.0
%
 
$
5,092
     
13.8
%
 
$
11,918
     
11.5
%
 
$
11,514
     
11.1
%
   Upholstery
   
2,199
     
8.2
%
   
1,178
     
6.0
%
   
6,807
     
9.6
%
   
4,256
     
6.9
%
   Home Meridian
   
4,607
     
5.0
%
   
3,503
     
4.1
%
   
10,658
     
4.1
%
   
5,956
     
2.6
%
   All other
   
409
     
14.6
%
   
165
     
6.1
%
   
721
     
9.5
%
   
430
     
6.0
%
   Intercompany eliminations
   
-
             
1
             
4
             
8
         
Consolidated
 
$
11,205
     
7.1
%
 
$
9,939
     
6.8
%
 
$
30,108
     
6.8
%
 
$
22,164
     
5.5
%
                                                                 
Capital Expenditures
                                                               
   Hooker Casegoods
 
$
268
           
$
343
           
$
1,259
           
$
1,065
         
   Upholstery
   
145
             
430
             
359
             
638
         
   Home Meridian
   
580
             
122
             
1,090
             
193
         
   All other
   
-
             
9
             
-
             
9
         
Consolidated
 
$
993
           
$
904
           
$
2,708
           
$
1,905
         
                                                                 
Depreciation & Amortization
                                                               
   Hooker Casegoods
 
$
490
           
$
566
           
$
1,452
           
$
1,650
         
   Upholstery
   
538
             
253
             
929
             
718
         
   Home Meridian
   
673
             
770
             
2,012
             
3,965
         
   All other
   
1
             
3
             
6
             
7
         
Consolidated
 
$
1,702
           
$
1,592
           
$
4,399
           
$
6,340
         
 
 
 
As of
October 29,
2017
   
%Total
   
As of
January 29,
2017
   
%Total
 
Assets
       
Assets
         
Assets
 
   Hooker Casegoods
 
$
125,232
     
47.5
%
 
$
130,917
     
48.6
%
   Upholstery
   
42,636
     
16.2
%
   
31,018
     
11.5
%
   Home Meridian
   
95,483
     
36.2
%
   
107,101
     
39.7
%
   All other
   
509
     
0.2
%
   
554
     
0.2
%
   Intercompany eliminations
   
-
     
0.0
%
   
(4
)
   
0.0
%
Consolidated assets
 
$
263,860
     
100.0
%
 
$
269,586
     
100
%
Consolidated goodwill and intangibles
   
78,657
             
49,110
         
Total consolidated assets
 
$
342,517
           
$
318,696
         



Sales by product type are as follows:

   
Net Sales (in thousands)
 
   
Thirteen Weeks Ended
   
Thirty-Nine Weeks Ended
 
   
October 29,
         
October 30,
         
October 29,
         
October 30,
       
   
2017
   
%Total
   
2016
   
%Total
   
2017
   
%Total
   
2016
   
%Total
 
Casegoods
 
$
115,106
     
73
%
 
$
107,994
     
74
%
 
$
316,639
     
71
%
 
$
286,039
     
71
%
Upholstery
   
42,828
     
27
%
   
37,304
     
26
%
   
128,475
     
29
%
   
117,253
     
29
%
   
$
157,934
     
100
%
 
$
145,298
     
100
%
 
$
445,114
     
100
%
 
$
403,292
     
100
%


 
14.      Related Party Transactions
 
We lease the four properties utilized in Shenandoah’s operations. One of our employees has an ownership interest in the entities that own these properties. The leases commenced on September 29, 2017, have an initial 48-month term, and an option to renew each for an additional seven years. All four leases include annual rent escalation clauses with respect to minimum lease payments after the initial 48-month term of the lease is completed. In addition to monthly lease payments, we also incur expenses for property taxes, routine repairs and maintenance and other operating expenses.  We paid $68,000 in lease payments to these entities during the fiscal 2018 third quarter.

 
15.      Subsequent Events
 
Dividends
 
On December 7, 2017, our board of directors declared a quarterly cash dividend of $0.14 per share, payable on December 29, 2017 to shareholders of record at December 18, 2017.
 


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 the “Hooker”, “Hooker Division” or “traditional Hooker” divisions or companies refer to the current components of our Hooker Casegoods and Upholstery operating segments, including Shenandoah since its characteristics (e.g. management, price points, margins and domestic manufacturing base), are like that of the other components of what we previously defined as the “legacy Hooker” business. References to the “Acquisition” refer to the recently completed acquisition of substantially all of the assets of Shenandoah Furniture, Inc. on September 29, 2017.  All references to specific quarterly 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 2018, 2017 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.

Forward-Looking Statements

Certain statements made in this report, including statements included under Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in this report, are not based on historical facts, but are forward-looking statements.  These statements reflect our reasonable judgment with respect to future events and typically can be identified by the use of forward-looking terminology such as “believes,” “expects,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “would,” “could” or “anticipates,” or the 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 including  integration costs, costs related to Acquisition debt, maintaining Shenandoah’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 Shenandoah, 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 concentrations of a material part of our sales and accounts receivable in only a few customers;
§
achieving and managing growth and change, and the risks associated with new business lines, acquisitions (including the recent Acquisition), restructurings, strategic alliances and international operations;
§
risks associated with our reliance on offshore sourcing and the cost of imported goods, including fluctuation in the prices of purchased finished goods and transportation and warehousing costs;
§
adverse political acts or developments in, or affecting, the international markets from which we import products, including duties or tariffs imposed on those products by foreign governments or the U.S. government, including the implementation of a possible border-adjustment tax;
§
our ability to successfully implement our business plan to increase sales and improve financial performance;
§
changes in actuarial assumptions, the interest rate environment, the return on plan assets and future funding obligations related to the Pension Plan, which can affect future funding obligations, costs and plan liabilities;
 
§
the possible impairment of our long-lived assets, which can result in reduced earnings and net worth;
§
the cost and difficulty of marketing and selling our products in foreign markets;
§
disruptions involving our vendors or the transportation and handling industries, particularly those affecting imported products from Vietnam and China, including customs issues, labor stoppages, strikes or slowdowns and the availability of shipping containers and cargo ships;
§
the interruption, inadequacy, security breaches or integration failure of our information systems or information technology infrastructure, related service providers or the internet;
§
disruptions affecting our Virginia, North Carolina or California warehouses, our Virginia or North Carolina administrative facilities or our representative offices in Vietnam and China;
§
when or whether our new business initiatives, including the recent Acquisition and the acquisition of Home Meridian, 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 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;
§
risks associated with distribution through third-party retailers, such as non-binding dealership arrangements;
§
capital requirements and costs, including the servicing of our floating-rate term loans;
§
competition from non-traditional outlets, such as 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 and workers’ compensation costs that may increase the cost of our self-insured healthcare and workers’ compensation plans.
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Any forward-looking statement we make speaks only as of the date of that statement, and we undertake no obligation, except as required by law, to update any forward-looking statements whether as a result of new information, future events or otherwise and you should not expect us to do so.

Our business is subject to a number of significant risks and uncertainties any of which can adversely affect our business, results of operations, financial condition or future prospects. For a discussion of risks and uncertainties that we face, see the Forward Looking Statements detailed above and Item 1A, “Risk Factors” in our 2017 annual report on Form 10-K (the “2017 Annual Report”), and Item 1A of Part II of this quarterly report on Form 10-Q.

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


This quarterly report on Form 10-Q includes our unaudited condensed consolidated financial statements for the thirteen-week period (also referred to as “three months,” “three-month period,” “quarter,” “third quarter” or “quarterly period”) that began July 31, 2017, and the thirty-nine week period (also referred to as “nine months,” or “nine-month period”) that began January 30, 2017, which both ended October 29, 2017. This report discusses our results of operations for this period compared to the 2017 fiscal year thirteen-week period that began August 1, 2016 and the thirty-nine week period that began February 1, 2016, which both ended October 30, 2016; and our financial condition as of October 29, 2017 compared to January 29, 2017.

References in this report to:

§
the 2018 fiscal year and comparable terminology mean the fiscal year that began January 30, 2017 and will end January 28, 2018; and

§
the 2017 fiscal year and comparable terminology mean the fiscal year that began February 1, 2016 and ended January 29, 2017.

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 2017 Annual Report filed with the SEC on April 14, 2017. Our 2017 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 2017 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”), incorporated in Virginia in 1924, is a designer, marketer and importer of casegoods (wooden and metal furniture), leather furniture and fabric-upholstered furniture for the residential, hospitality and contract markets. We also domestically manufacture premium residential custom leather and custom fabric-upholstered furniture. We are ranked among the nation’s top five largest publicly traded furniture sources, based on 2016 shipments to U.S. retailers, according to a 2017 survey by a leading trade publication.

Our strategy is to leverage the financial strength afforded us by Hooker’s slower-growing but highly profitable traditional Hooker companies in order to boost revenues and earnings both organically and by acquiring companies selling in faster-growing channels of distribution in which our legacy businesses are under-represented. Consequently, Hooker acquired Home Meridian on February 1, 2016.
 
Hooker’s acquisition of Home Meridian has better positioned us in some of the fastest growing and emerging channels of distribution, including e-commerce, warehouse membership clubs, and contract channels of distribution, although at lower margins. This acquisition has provided the Home Meridian segment’s current leadership team with greater financial flexibility by virtue of Hooker’s strong balance sheet and, consequently, has afforded it greater operational focus.
 
Additionally, the Acquisition of Shenandoah, a North Carolina-based domestic upholsterer, on September 29, 2017 should better position us in the “lifestyle specialty” retail distribution channel, which we believe is gaining market share and doing well with multiple demographic groups. For that channel, domestically-produced, customizable upholstery is extremely viable and preferred by the end consumers who shop at retailers in that channel.


Overview

Our net sales are derived from the sale of home furnishings, as well as hospitality and contract furniture. We believe that consumer home furnishings purchases are impacted by an array of factors, including general economic conditions (such as consumer confidence, availability of consumer credit, energy and other commodity prices), and housing and mortgage markets. These purchases are also impacted by lifestyle-driven factors such as changes in fashion trends, disposable income, household formation and turnover, as well as competition with other discretionary purchases. Hospitality furniture sales are driven primarily by new hotel construction and hotel remodeling activity, which is linked to the strength of the overall economy, including business and personal spending levels. Contract furniture sales are driven largely by senior living facility construction and remodeling activity, which is linked to the number of consumers entering retirement, which is partially related to the strength of the overall economy, including stock market performance.

Approximately 90% of our fiscal 2017 sales were of imported furniture products, primarily from Asia. Our lower overhead, variable-cost import operations help drive our profitability and provide us with more flexibility to respond to changing demand by adjusting inventory purchases from suppliers. This import model requires constant vigilance due to a larger investment in inventory and longer production lead times. We constantly evaluate our imported furniture suppliers and when quality concerns, inflationary pressures, or trade barriers (such as duties and tariffs) diminish our value proposition, we transition sourcing to other suppliers, often located in different countries or regions. Our domestic upholstery operations have both significantly higher overhead and fixed costs than our import operations, and their profitability can be and has been adversely affected by economic downturns.

Executive Summary-Results of Operations

The Acquisition closed on the last business day of our September fiscal period. Consequently, the Upholstery segment’s results include only Shenandoah’s October results. Shenandoah’s prior year results are not included in the results discussed below.

Consolidated net sales for the fiscal 2018 third quarter grew 8.7% to $157.9 million and grew 10.4% to $445.1 million in the first nine months of fiscal 2018 due primarily to net sales increases in the Upholstery and Home Meridian segments. Net sales in the Upholstery segment increased by $7.0 million or 35.8% as compared to the prior year quarter, primarily due to sales increases in the Hooker Upholstery division and the inclusion of Shenandoah’s sales for one month of the quarter. Home Meridian’s net sales increased $6.0 million or 7% as compared to the prior year third quarter. Hooker Casegoods net sales decreased 1.3% while All other segment net sales increased 2.7% for the fiscal 2018 third quarter.

For the fiscal 2018 first nine-months, Home Meridian, Upholstery and All other segments had net sales increases of 13.3%, 16% and 7%, respectively. Net sales in Hooker Casegoods were essentially flat. Consolidated net income for the fiscal 2018 third quarter increased $743,000 or 11.5% as compared to the prior year third quarter and increased $5.4 million or 37.9% compared to the prior year first nine months, despite the inclusion of approximately $700,000 of Acquisition-related expenses in both current year periods.

As discussed in greater detail under “Results of Operations” below, the following are the primary factors that affected our consolidated fiscal 2018 third quarter and first nine months results of operations:

§
Gross profit. Consolidated gross profit increased in absolute terms and as a percentage of net sales for the fiscal 2018 third quarter due primarily to higher net sales in the Home Meridian and Upholstery segments. Upholstery segment gross profit increased due to increased net sales at Hooker Upholstery, Bradington-Young and the addition of Shenandoah’s sales in the last month of the fiscal period. Home Meridian segment gross profit increased due to higher net sales and lower returns, sales allowance and discount expense as a percentage of net sales.  Consolidated gross profit increased in absolute terms and as a percentage of net sales for the fiscal 2018 first nine-months for primarily the same reasons as noted for the quarterly periods.

§
Selling and administrative expenses. During the fiscal 2018 third quarter, consolidated selling and administrative (“S&A”) expenses increased in absolute terms but remained flat as a percentage of net sales primarily due to higher selling expense, higher compensation and bonus expense, the inclusion of approximately $700,000 Acquisition-related costs, and, to a lesser extent, the addition of Shenandoah’s S&A expenses during the quarter. During the 2018 first nine months, consolidated S&A expenses increased in absolute terms primarily due to higher bonus and salaries expenses, selling expense, bad debt expense and the inclusion of approximately $700,000 in acquisition-related costs.


§
Intangible asset amortization expense. Amortization of intangibles of $624,000 and $1.3 million was recorded in the fiscal 2018 third quarter and the fiscal 2018 first nine months, respectively, compared to $334,000 and $2.8 million in the comparable prior year periods. Amortization expense for the fiscal 2018 third quarter includes $290,000 in amortization expense on newly-acquired Shenandoah intangibles.

§
Operating income. Consolidated operating income increased $1.3 million or 12.7% in the fiscal 2018 third quarter and increased $7.9 million or 35.8% in the fiscal 2018 first nine months, due to the factors discussed above and in greater detail below.

Review

We were pleased to have achieved an approximate 9% consolidated sales increase during the fiscal 2018 third quarter, with sales up across all segments. The Home Meridian segment led the consolidated net sales increase with a 7% increase in net sales for the fiscal 2018 third quarter and 13.3% net sales increase for the fiscal 2018 first nine months, primarily due to increased sales to mega, e-commerce and alternate channel accounts. The Home Meridian segment ended the first nine months with a 17.3% year-to-date increase in sales orders; however, that segment’s sales order backlog is down 14.7% as of quarter-end. Additionally, the customer mix and related sales allowance issues that strained Home Meridian’s margins in the fiscal 2018 first quarter, were muted in the second and third quarters. Consequently, that segment’s gross margins increased in both the fiscal third quarter and first nine months. Upholstery segment net sales increased in the double-digits for the quarter and for the nine-month period, due to the addition of Shenandoah’s sales for the last month of the fiscal period and on the strength of double-digit sales increases in the Hooker Upholstery division and including upper single-digit increases at the Bradington-Young division of that segment. Hooker Upholstery’s sales increased primarily due to a better in-stock position, now that the division has fully recovered from inventory shortages that resulted from a vendor-quality issue in the prior year, and due to the shipments of recently introduced and well-received new products. Bradington-Young’s net sales increased primarily due to increased sales of higher priced luxury motion products. Net sales increased 7.6% at Sam Moore in the third quarter; however, that division’s sales were essentially flat for the first nine-months of the fiscal year. Additionally, Sam Moore’s operating profit performance was flat for the third quarter and is lower for the nine-month period, as that division continues to struggle with labor efficiency issues that have led to longer delivery times, which has resulted in lower orders and net sales and increased manufacturing costs. The Upholstery segment’s year-to-date sales orders were up 7.7%; however, its order backlog was down 4.5% as of the end of the third quarter, both as compared to the comparable prior year periods. Hooker Casegoods segment net sales were essentially flat for both the quarter and nine-month period and operating profit for both periods remained strong despite the approximate $700,000 in Acquisition-related expenses included in that segment. Hooker Casegoods sales orders increased 5.7% year-to-date October and backlog was up 25.1% at quarter-end.

In addition to increased net sales, consolidated operating profitability improved for the nine-month period both due to the absence of approximately $1 million in Home Meridian acquisition-related costs that were incurred in the prior year and a $1.8 million decrease in amortization expense on Home Meridian acquisition-related intangibles.



Results of Operations

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

   
Thirteen Weeks Ended
   
Thirty-Nine Weeks Ended
 
   
October 29,
   
October 30,
   
October 29,
   
October 30,
 
   
2017
   
2016
   
2017
   
2016
 
Net sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
Cost of sales
   
78.3
     
78.7
     
78.5
     
78.7
 
Gross profit
   
21.7
     
21.3
     
21.5
     
21.3
 
Selling and administrative expenses
   
14.2
     
14.2
     
14.4
     
15.1
 
Intangible asset amortization
   
0.4
     
0.2
     
0.3
     
0.7
 
Operating income
   
7.1
     
6.8
     
6.8
     
5.5
 
Other income, net
   
0.2
     
0.1
     
0.2
     
0.2
 
Interest expense, net
   
0.2
     
0.2
     
0.2
     
0.2
 
Income before income taxes
   
7.1
     
6.8
     
6.8
     
5.5
 
Income tax expense
   
2.5
     
2.4
     
2.4
     
1.9
 
Net income
   
4.6
     
4.4
     
4.4
     
3.5
 

Fiscal 2018 Third Quarter Compared to Fiscal 2017 Third Quarter

   
Net Sales
 
   
Thirteen Weeks Ended
 
   
October 29, 2017
         
October 30, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
36,373
     
23.0
%
 
$
36,861
     
25.4
%
 
$
(488
)
   
-1.3
%
Upholstery
   
26,701
     
16.9
%
   
19,664
     
13.5
%
   
7,037
     
35.8
%
Home Meridian
   
92,068
     
58.3
%
   
86,053
     
59.2
%
   
6,015
     
7.0
%
All Other
   
2,792
     
1.8
%
   
2,720
     
1.9
%
   
72
     
2.6
%
  Consolidated
 
$
157,934
     
100
%
 
$
145,298
     
100
%
 
$
12,636
     
8.7
%

Unit Volume
 
FY18 Q3 % Change vs.
FY17 Q3
   
Average Selling Price (ASP)
 
FY18 Q3 % Change vs.
FY17 Q3
 
                 
Hooker Casegoods
   
0.3
%
 
Hooker Casegoods
   
-0.7
%
Upholstery
   
42.5
%
 
Upholstery
   
-4.9
%
Home Meridian
   
8.6
%
 
Home Meridian
   
-1.7
%
All Other
   
-12.4
%
 
All Other
   
16.2
%
Consolidated
   
9.1
%
 
Consolidated
   
-0.3
%


Consolidated net sales increased primarily due to higher net sales in the Upholstery and Home Meridian segments, as well as the addition of Shenandoah’s October sales of $3.1 million in the quarter. These increases were partially offset by a decline in average selling prices (“ASP”) in those same segments. Upholstery segment unit volume increased primarily due to increased sales at the Hooker Upholstery division and to a lesser extent at Bradington Young and Sam Moore. Upholstery segment ASP decreased primarily due to lower ASP at the Hooker Upholstery and Sam Moore divisions, partially offset by higher ASP in the Bradington-Young division. The Home Meridian segment’s unit volume increased primarily due to increased sales to emerging channels, especially e-commerce. The decrease in Home Meridian segment ASP was attributable to customer mix. Although a small part of our consolidated results, unit volume decreased and ASP increased in our All Other segment due to the lack of Homeware net sales during the quarter, as that business completed its wind-down during the fiscal 2018 second quarter.
   
Gross Profit and Margin
 
   
Thirteen Weeks Ended
 
   
October 29, 2017
         
October 30, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
11,346
     
31.2
%
 
$
12,081
     
32.8
%
 
$
(735
)
   
-6.1
%
Upholstery
   
6,190
     
23.2
%
   
4,311
     
21.9
%
   
1,879
     
43.6
%
Home Meridian
   
15,808
     
17.2
%
   
13,742
     
16.0
%
   
2,066
     
15.0
%
All Other
   
934
     
33.4
%
   
791
     
29.1
%
   
143
     
18.1
%
Intercompany Eliminations
   
-
             
1
             
(1
)
   
-100.0
%
  Consolidated
 
$
34,278
     
21.7
%
 
$
30,926
     
21.3
%
 
$
3,352
     
10.8
%

Consolidated gross profit increased in absolute terms and as a percentage of net sales in the fiscal 2018 third quarter, primarily due to improved profit margin in Home Meridian and Upholstery segments due primarily to increased net sales in those segments, and the addition of Shenandoah’s October sales in the Upholstery segment. The Hooker Upholstery division was the primary driver of increased gross profit in the Upholstery segment due to increased sales and lower product costs. Those increases were partially offset by decreased gross profit in Hooker Casegoods segment due to the sales shortfall and increased returns and allowance and advertising expenses.

   
Selling and Administrative Expenses
 
   
Thirteen Weeks Ended
 
   
October 29, 2017
         
October 30, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
7,356
     
20.2
%
 
$
6,988
     
19.0
%
 
$
368
     
5.3
%
Upholstery
   
3,701
     
13.9
%
   
3,133
     
15.9
%
   
568
     
18.1
%
Home Meridian
   
10,867
     
11.8
%
   
9,906
     
11.5
%
   
961
     
9.7
%
All Other
   
525
     
18.8
%
   
626
     
23.0
%
   
(101
)
   
-16.1
%
  Consolidated
 
$
22,449
     
14.2
%
 
$
20,653
     
14.2
%
 
$
1,796
     
8.7
%

Consolidated S&A expenses remained flat as a percentage of net sales but increased in absolute terms due primarily to higher selling expenses, higher compensation and benefits expenses, increased bonus expenses due to increased earnings, the inclusion of approximately $700,000 in Acquisition-related costs, and, to a lesser extent, the addition of Shenandoah’s October S&A expenses.

   
Intangible Asset Amortization
 
   
Thirteen Weeks Ended
 
   
October 29, 2017
         
October 30, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Intangible asset amortization
 
$
624
     
0.4
%
 
$
334
     
0.2
%
 
$
290
     
86.8
%



Intangible asset amortization expense was higher in the current quarter due to Acquisition-related amortization expense.

   
Operating Profit and Margin
 
   
Thirteen Weeks Ended
 
   
October 29, 2017
         
October 30, 2016
         
$ Change
   
% Change
 
         
% Net Sales
         
% Net Sales
             
Hooker Casegoods
 
$
3,990
     
11.0
%
 
$
5,092
     
13.8
%
 
$
(1,102
)
   
-21.6
%
Upholstery
   
2,199
     
8.2
%
   
1,178
     
6.0
%
   
1,021
     
86.7
%
Home Meridian
   
4,607
     
5.0
%
   
3,503
     
4.1
%
   
1,104
     
31.5
%
All Other
   
409
     
14.6
%
   
165
     
6.1
%
   
244
     
147.9
%
Intercompany Eliminations
   
-
             
1
             
(1
)
   
-100.0
%
  Consolidated
 
$
11,205